incoterms 2000: regulation and practical advice for their use

Guide for International Trade Professionals

INCOTERMS 2000 Regulation and practical advice for their use

Complete and illustrated guide of the 13 INCOTERMS 2000

Regulation and Practical advice INCOTERMS 2000

©Global Marketing Strategies www.globalnegotiator.com

2

INDEX

Nº of page

What are Incoterms?.........................................................................................3 What are they used for?....................................................................................3 Groups and types of Incoterms........................................................................ 4

Incoterms and transfer of risks…………………………………………….............4 Examples of the correct use of Incoterms………………………………………...5 Variants of Incoterms………………………………………………………………..6 Incoterms one by one……………………………………………………………….6 EXW - Ex Work………………………………………………………………..…. 7 FCA - Free Carrier………………………………………………………….……12 FAS - Free Alongside Ship…………………………………………………….17 FOB - Free on Board……………………………………………………………21 CFR - Cost and Freight…………………………………………………………25 CIF - Cost, Insurance and Freight……………………………………………29 CPT - Cost Paid To…………………………………………………………….. 34 CIP - Carriage Paid To………………………………………………………. 38 DAF - Delivered At Frontier…………………………………………………….43 DES - Delivered Ex Ship………………………………………………………. 48 DEQ - Delivered Ex Quay………………………………………………………52 DDU - Delivered Duty Unpaid………………………………………………….56 DDP - Delivered Duty Paid……………………………………………………..60



3

WHAT ARE INCOTERMS? Incoterms (INternational COmmerce TERMS – Terms of International Commerce) are thirteen terms, published by the International Chamber of Commerce (ICC), whose headquarters are in Paris, which define the delivery conditions of the goods in international sale operations. Its first edition was written in the year 1936 and, later, consecutive reviews and up-to-dates have been made before the regulation which is nowadays in force, the regulation published in the year 2000 (Incoterms 2000). The obligations that sellers (exporters) and buyers (importers) must fulfil for the delivery of the goods are accurately established in the ICC regulations for each of the thirteen Incoterms, especially those obligations referred to the division of costs and expenses of the international operative between exporters and importers. Below are shown the 13 Incoterms, classified in four groups (E, F, C and D), with the meaning of the abbreviations in English and in Spanish.

Classification of Incoterms 2000

Incoterms determine accurately the delivery conditions of the goods. However, it is important to notice that they do not specify a lot of aspects related to international sale operations such the transfer of property, the means of payment, the credit terms, the responsibility due to different causes, indemnities, etc. These aspects must be resolved in accordance with that established in the international sale contract and in compliance with the applicable law in each country. It is worth mentioning that Inconterms are only used in international sales of goods (tangible products) and they are not applied in the trade of services (intangible products). This is due to the fact that there is neither a physical delivery nor a logistics need or customs clearance in this activity.

WHAT ARE THEY USED FOR? Incoterms were created because exporters and importers needed to come to an agreement in some aspects related to international operations. That is the reason why the International Chamber of Commerce has made a regulation of private law in which the obligations of exporters and importers related to delivery conditions in an international sale are regulated.

Group In English In Spanish Group E EXW

Departure Ex Works

Salida En fábrica

Group F FCA FAS FOB

Main carriage unpaid Free Carrier Free Alongside Ship Free on Board

Transporte Principal no pagado Franco Transportista Franco al Costado del Buque Franco a bordo

Group C CFR CIF CPT CIP

Main carriage paid Cost and Freight Cost, insurance and Freight Carriage Paid To Carriage and Insurance Paid To

Transporte Principal pagado Coste y flete Coste, seguro y flete Transporte pagado hasta Transporte y seguro pagado hasta

Group D DAF DES DEQ DDU DDP

Arrival Delivered At Frontier Delivered Ex Ship Delivered Ex Quay Delivered Duty Unpaid Delivered Duty Paid

Llegada Entregada en frontera Entregada sobre buque Entregada en muelle Entregada derechos no pagados Entregada derechos pagados



4

In order to be precise, the Incoterms purposes are:

• The division of costs between the seller (exporter) and the buyer (importer). • The place where goods are delivered. • The documents that the exporter must provide the importer. • The transfer of risks during the goods carriage between the exporter and the importer.

Certainly, the main purpose of Incoterms is to define accurately the division of costs in an international operation. Specifically, it is established who must assume each of every costs of an international operation: packaging and checking, collection in the factory or in the warehouse, domestic and international carriage, expenses in terminals and logistics platforms, carriage insurance, customs clearance, duties and taxes. GROUPS AND TYPES OF INCOTERMS Incoterms can be classified in accordance with three criteria: the mode of transport used, the payment of the main carriage, and the goods delivery obligation. Firstly, the use of Incoterms depends on the mode of transport which is used. Some Incoterms can be used with any mode of transport (terrestrial, aerial, maritime, multimodal), they are called versatile Incoterms. Other Incoterms can only be used for maritime transport.

• Incoterms for any mode of transport: EXW, FCA, CPT, CIP, DAF DDU and DDP. • Incoterms, only for carriage of the goods by sea or by inland waterway: FAS, FOB, CFR,

CIF, DES and DEQ. Secondly, with regard to the payment of the main carriage, that is to say, the international carriage, there is a difference between those Incoterms in which the payment is made by the seller (exporter) and those other Incoterms in which the payment is made by the buyer (importer).

• Incoterms in which the payment of the main carriage is made by the buyer (importer): EXW, FCA, FAS and FOB.

• Incoterms in which the payment of the main transport is made by the seller (exporter): CFR, CFT, CIF, CIP, DAF, DES, DEQ, DDU and DDP.

INCOTERMS AND TRANSFER OF RISKS As far as the transfer of risks in carriage matters is concerned, this transfer takes place at the moment of delivery of the goods. It is important to distinguish between those Incoterms in which the seller (exporter) is responsible for the delivery of the goods and therefore, the risk that he assumes in carriage finishes in the country of origin; and those Incoterms in which the obligation of delivery of the goods takes place in the country of destination. The first case is referred to Incoterms of “sale in origin” and the second case is referred to Incoterms of “sale in destination”.

• Incoterms of sale in origin (the delivery takes place in the country of origin): EXW, FCA, FAS, FOB, CFR, CFT, CIF, CIP.

• Incoterms of sale in destination (the delivery takes place in the country of destination): DAF, DES, DEQ, DDU and DDP.

With regard to Incoterms of the C group (CFR, CPT, CIF and CIP), it is important to notice that although the seller assumes all costs of international carriage until the arrival of the goods to the agreed country of destination, the delivery takes place in the country of origin when the goods are loaded on the first means of transport. Thus, in Incoterms CIF and CIP, which include compulsory



5

carriage insurance, the seller hires and pays the insurance, even if the beneficiary is the buyer, who assumes the risk of transport. In order to specify correctly the transfer of risks, it is important to know accurately the place of delivery of the goods, which is perfectly defined in the Incoterms regulation.

Moment at which the risk of transport is transferred for each Incoterm (place of delivery of the goods)

EXW FCA FAS FOB CFR CIF CPT CIP DAF DES DEQ DDU DDP

When the goods are placed at the disposal of the buyer, generally in the factory or in the seller’s warehouse. When the goods are delivered to the first carrier, in the seller’s country. When the goods are placed alongside the ship at the named port of shipment. When the goods pass the ship’s rail at the named port of shipment. When the goods pass the ship’s rail at the named port of shipment. When the goods pass the ship’s rail at the named port of shipment. When the goods are delivered to the first carrier, in the seller’s country. When the goods are delivered to the first carrier, in the seller’s country. When the goods are delivered to the first carrier, generally at the frontier of the country of destination. When the goods are placed at the disposal of the buyer on board of the ship at the port of shipment. When the goods are placed at the disposal of the buyer on the quay of the port of shipment. When the goods are placed at the disposal of the buyer, generally in the destination country. When the goods are placed at the disposal of the buyer, generally in his factory or in his warehouse.

EXAMPLES OF THE CORRECT USE OF INCOTERMS Incoterms are used in several documents of international commerce but they are specially used in three types of documents: international commercial offers, international sale contracts and documentary credits (or letters of credit). It is important to use Incoterms correctly in all these documents; otherwise some disputes between the parties can arise. Incoterms would not be applied in the possible resolution of conflicts concerning foreign trade operations if it is not clearly stated in the commercial document (offer, invoice) or in the contract, that the delivery conditions are regulated by Incoterms 2000. In order to use Incoterms in a correct way, firstly it must be written the agreed Incoterm (with capital letters), secondly, the point of delivery of the goods defined as accurately as possible and finally, it must be mentioned that it is referred to the regulation of Incoterms 2000 of the International Chamber of Commerce.



6

Examples of Incoterms correct use

Who is the seller Incoterm correct use Spanish Exporter Mexican Exporter Chilean Exporter Colombian Exporter

EXW seller’s factory, Madrid (Spain), Incoterms 2000 FCA Monterrey airport (Mexico), Incoterms 2000 CIF Marseille port (France), Incoterms 2000 DDP buyer’s warehouse, Chicago (United States), Incoterms 2000

VARIANTS OF INCOTERMS The international commerce practise has made that, sometimes, exporters or importers add some words to the Incoterm in order to precise better the division of costs between the parties. It is important to notice that the regulation of Incoterms 2000 does not offer any guide about the use of these variants. However, some of them are mentioned in the introductory chapter of the publication, specifically, it refers to three of them:

• EXW loaded on, the seller pays the costs for loading –and, therefore, the risks- the goods on the lorry that collects them.

• FOB stowed, the seller pays all costs -and, therefore, all risks of the goods in the port of shipment.

• DDP unloaded, the buyer pays the costs for unloading the goods –and, therefore, the risks- from the lorry that delivers them in the place of destination.

In any case, if a variant of Incoterms is used, it is advisable to specify clearly in the sale contract how are divided between the parties the costs and risks referred to the variant. INCOTERMS ONE BY ONE Below there is an analysis of each of the 13 Incoterms which includes, the complete regulation with the obligations of the seller (exporter) and those of the buyer (importer), the main characteristics and practical advice for their use, based on the type of product, means of transport used and the destination country of the goods.



7

Costs paid by the seller

INCOTERM EXW Ex Works (….. named place)

Seller Export

Documents Domestic Transport

Export Customs Port Main

Transport Port Import Customs

Domestic Transport

Import Documents Buyer

Risks assumed by the seller HOW TO USE EXW “Ex works” means that the seller delivers when he places the goods 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 form the seller’s premises. However, if the parties 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 this effect in the contract of sale. This term should not be used when the buyer cannot carry out the export formalities directly or indirectly. In such circumstances, the FCA term should be used, provided the seller agrees that he will load at his cost and risk. MAIN CHARACTERISTICS OF EXW • This Incoterm can be used with any mode of transport, including multimodal transport. • The seller undertakes to prepare the goods for the agreed date and place (usually in the factory

or in the warehouse of his company). • The goods must be perfectly packaged and marked so as to resist the means of transport and

the manipulations that could be made during the transit. • The buyer must pay the costs for loading the goods on the means of transport. • The buyer must pay the costs for the carriage in the country of origin and for the export customs

clearance. • The seller must provide the buyer with all documents that he may need (commercial invoice, list

of contents, certificate of origin, certifications, etc) so that he could make both the export

Costs paid by the buyer

Risks assumed by the buyer



8

customs clearance (in the country of origin) and the import customs clearance (in the country of destination).

THE SELLER’ S OBLIGATIONS (EXPORTER) IN EXW Provision of goods in conformity with the contract.- The seller must provide the goods and the commercial invoice, or its equivalent electronic message, in conformity with the contract of sale and any other evidence of conformity which may be required by the contract. Licences, authorizations and formalities.- The seller must render the buyer, at the latter’s request, risk and expense, every assistance in obtaining, where applicable, any export licence or other official authorization necessary for the export of the goods. Contracts of carriage and insurance.- a) Contract of carriage: no obligation. b) Contract of insurance: no obligation. Delivery.- The seller must place the goods at the disposal of the buyer at the named place of delivery, not loaded on any collecting vehicle, on the date or within the period agreed or, of no such time is agreed, at the usual time for delivery of such goods. If no specific point has been agreed within the named place, and if there are several points available, the seller may select the point at the place of delivery which best suits his purpose. Transfer of risks.- The seller must, subject to the provisions of transfer of risks, bear all risks of loss of or damage to the goods until such time as they have been delivered in accordance with the established conditions. Division of costs.- The seller must, subject to the provisions of division of costs, pay all costs relating to the goods until such time as they have been delivered in accordance with the established conditions. Notice to the buyer.- The seller must give the buyer sufficient notice as to when and where the goods will be placed at his disposal. Proof of delivery, transport document or equivalent electronic message.- No obligation Checking-packaging-marking.- The seller must pay the costs of those checking operations (such as checking quality, measuring, weighing, counting) which are necessary for the purpose of placing the goods at the buyer’s disposal. The seller must provide ay his own expense packaging (unless it is usual for the particular trade to make the hoods of the contract description available unpacked) which is required for the transport of the goods, to the extent that the circumstances relating to the transport (for example modalities, destination) are made known to the seller before the contract of sale is concluded. Packaging is to be marked appropriately. Other obligations.- the seller must render the buyer at the latter’s request, risk and expense, every assistance in obtaining any documents or equivalent electronic messages issued or transmitted in the country of delivery and/or of origin which the buyer may require for the export and/or import of the goods and, where necessary, for their transit through any country. The seller must provide the buyer, upon request, with the necessary information for procuring insurance.



9

THE BUYER’S OBLIGATIONS (IMPORTER) IN EXW Payment of the price.- The buyer must pay the price as provided in the contract of sale. Licences, authorizations and formalities.- The buyer must obtain at his own risk and expense any export and import licence or other official authorization and carry out, where applicable, all customs formalities for the export of the goods. Contracts of carriage and insurance.- a) Contract of carriage: no obligation. b) Contract of insurance: no obligation. Taking delivery.- The buyer must take delivery of the goods when they have been delivered in accordance with the established conditions and notice to the seller. Transfer of risks.- The buyer must bear all risks of loss of or damage to the goods • From the time they have been delivered in accordance with the established conditions; and • From the agreed date or the expiry date of any period fixed for taking delivery which arise

because he fails to give notice, provided, however, that the goods have been duly appropriated to the contract, that is to say clearly set aside or otherwise identified as the contract goods.

Division of costs.- The buyer must pay • All costs relating to the goods from the time they have been delivered in accordance with the

established conditions; and • any additional costs incurred by failing either to take delivery of the goods when they have been

placed at his disposal, or to give appropriate notice, provided, however that the goods have been duly appropriated to the contract, that is to say, clearly set aside or otherwise identified as the contract goods; and

• where applicable, all duties, taxes and other charges as well as the costs of carrying out

customs formalities payable upon export. The buyer must reimburse all costs and charges incurred by the seller in rendering assistance in accordance with licences, authorizations and formalities. Notice to the seller.- The buyer must, whenever he is entitled to determine the time within an agreed period and/or the place of taking deliver, give the seller sufficient notice thereof. Proof of delivery, transport document of equivalent electronic message.- The buyer must provide the seller with appropriate evidence of having taken delivery. Inspection of goods.- The buyer must pay the costs of any pre-shipment inspection, including inspection mandated by the authorities of the country of export. Other obligations.- The buyer must pay all costs and charges incurred in obtaining the documents or equivalent electronic massages mentioned in other seller’s obligations and reimburse those incurred by the seller in rendering his assistance in accordance therewith.



10

PRACTICAL ADVICE FOR THE USE OF EXW It is the first Incoterm of the thirteen existing and the only one of the “E” family. The rest of Incoterms are grouped in the “F”, “C” and “D” families. This Incoterm is the one that has less obligations for the seller, who must only place the goods at the disposal of the buyer, generally in the factory or in the warehouse of the own seller. It lets the seller to price the products cheaper because they do not include the logistics costs and therefore he does not assume the costs and risks in the international operative management. However, it is the Incoterm that offers the smallest level of service because it forces the buyer to assume totally the logistics management. With regard to the loading of the goods on the first means of transport (generally a lorry) it is important to notice that this loading must be paid by the buyer. Nevertheless, in most cases, the daily experience shows that it is the seller who assumes this cost and risk because the lorries that collect the goods do not always have the means to load them. When the buyer do not want to assume neither the cost nor the risk of the load on the lorry that collects the goods, it is preferable to use another Incoterm (for example FCA). EXW is the only Incoterm in which the exporter does not have to make any procedure for the export customs clearance. In this sense, there is not a document which proves that the goods have been exported from the E.U. Thus, for the purposes of the application of indirect taxes (VAT in Europe) or other regulations, the exporter must request the buyer’s customs broker a copy of the SAD (Single Administrative Document), which constitutes the documents that prove that the exportation has been made, or the transport document (CMR), which justifies that the goods are going to be exported. On the contrary, this document is not needed for operations with those countries in which the free circulation of the goods exists (such the EU). Therefore, it is better to use EXW for sales in these countries than in third countries. Likewise, EXW should not be used in those operations in which goods are carried by ship or by plane and when the payment is going to be made through a documentary credit (or letter of credit) in cash, because the seller could not present the bill of lading or the air waybill which are some documents usually needed to collect the documentary credit. It is better to use the EXW in operations of full load rather than those of break bulk cargo because in a full load, the vehicle will be load in the factory or in the seller’s warehouse whereas in a grouping the delivery will be probably made in a platform or a logistics centre, where the consolidation of the main transport is made. It is not advisable to use EXW in an indiscriminated way for all operations because there are some Incoterms that fit quite better for some uses that have been wrongly attributed to EXW. This Incoterm is useful for the following types of international operations: • First operations of companies that have very little experience and knowledge of foreign trade. • International sale operations between subsidiary companies that are members of the same

multinational group in which it exists a total transparency and trust concerning the way of operating.

• Operations of full load in which there is only a transport document for all the journey and it is not

necessary to carry out customs duties because the goods go to an area of countries (for example the EU) which has a regime of free circulation of the goods and, therefore, there is no customs clearance.



11

VARIANTS OF EXW

There is a version of this Incoterm known as EXW loaded on, in which the seller pays the costs for loading -and therefore the risks- the goods on the lorry that collects them. Nevertheless, in case any variant is used, the Incoterms 2000 regulation advices to clearly specify in the sale contract how are divided between the parties the costs and risks to which the variant is referred. Sometimes, the terms Ex-factory, Ex-warehouse or Ex-mill are used as an equivalent of EXW. Ex-cellar is usually used in international sale operations of wine.



12

Costs paid by the buyer

Risks assumed by the buyer

INCOTERM FCA Free Carrier (….. named place)

Seller Export

Documents Transport Domestic

Export Customs Port Main

Transport Port Import Customs

Domestic Transport

Import Documents Buyer

Risks assumed by the seller HOW TO USE FCA “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. This term may be used irrespective of the mode of transport, including multimodal transport. “Carrier” means any person who, in a contract of carriage, undertakes to perform or to procure the performance of transport by rail, road, air, sea, inland waterway or by a combination of such modes. If the buyer nominates a person other than a carrier to receive the goods, the seller is deemed to have fulfilled his obligation to deliver the goods when they are delivered to that person. MAIN CHARACTERISTICS OF FCA

• This Incoterm can be used with any mode of transport, including multimodal transport. • The seller undertakes to deliver the goods at the agreed place, in the country of origin. • The seller pays the costs for loading the goods on the means of transport that collect them. • The buyer pays the main transport and the carriage insurance. • The seller pays the export customs clearance whereas the import customs clearance is paid by

the buyer. • The transfer of risk because of loss of or damages takes place at the moment of delivery in the

country of origin. THE SELLER’S OBLIGATIONS (EXPORTER) IN FCA Provision of goods in conformity with the contract.- The seller must provide the goods and the commercial invoice, or its equivalent electronic message, in conformity with the contract of sale and any other evidence of conformity which may be required by the contract.

Costs paid by the seller

incoterms 2000: regulation and practical advice for their use

Documents

variants of incoterms

types of incoterms

classification of incoterms

practical advice incoterms

international operations

correct use of incoterms

international operative

international sale operations