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Practical Guide to INCOTERMS

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OLEGARIO LLAMAZARES

Practical Guide to

INCOTERMS

Place of delivery•

Transfer of risks•

Documents and customs•

Allocation of logistics costs•

Transport insurance•

Methods of payment•

PRACTICAL GUIDE TO INCOTERMS

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INDEX

WHAT ARE INCOTERMS RULES? ................................................................................... 6

Classification of Incoterms 2010 ................................................................................... 8

Main changes in Incoterms 2010 .................................................................................. 9

Aspects of foreign trade that Incoterms do not regulate ........................................ 13

Variants of Incoterms .................................................................................................. 14

WHAT ARE INCOTERMS USED FOR? .......................................................................... 15

The place of delivery .................................................................................................. 16

Documents and customs procedures ......................................................................... 19

Transfer of risks in transport ...................................................................................... 21

Allocation of logistics costs ........................................................................................ 22

OBLIGATIONS OF THE SELLER AND THE BUYER ........................................................ 27

EXW Ex Works ............................................................................................................ 28

FCA Free Carrier ........................................................................................................ 35

FAS Free Alongside Ship .......................................................................................... 42

FOB Free On Board .................................................................................................. 49

CPT Carriage Paid To ................................................................................................ 56

CFR Cost and Freight ............................................................................................... 63

CIP Carriage and Insurance Paid to ........................................................................ 70

CIF Cost, Insurance and Freight .............................................................................. 78

DAT Delivered At Terminal ....................................................................................... 86

DAP Delivered At Place ............................................................................................ 93

DDP Delivered Duty Paid ........................................................................................ 100

TEN KEYS FOR THE PROFESSIONAL USE OF INCOTERMS ....................................... 107

WHAT ARE INCOTERMS

RULES?

WHAT ARE INCOTERMS RULES?7

What are Incoterms rules?

Incoterms (INternational COmmerce TERMS) rules are a total of eleven terms pub-lished by the International Chamber of Commerce (ICC) based in Paris, which define the conditions of supply of goods in international sales transactions. The first edition was published in 1936 and subsequently have been making continuous revisions and updates (usually every ten years) to the one currently in force (Incoterms 2010).

The Incoterms 2010 rules are contained in Publication No. 715 of the International Chamber of Commerce in bilingual English-French edition. A copy of this publica-tion can be acquired, in both hard copy and e-book format, on the website www.iccbooks.com.

The writing of Incoterms rules is carried out by a group of experts belonging to differ-ent professions and activities, but most of them come from the legal field. The descrip-tion of each Incoterm includes a “guidance note” which provide guidelines for better use. The following sets out the obligations of each of the parties (seller and buyer) in ten sections that include, among others: delivery, transport and insurance contracts, transfer of risks, allocation of logistics costs, inspection of goods, notices, etc.

Incoterms are private law rules and are not supported by the laws of any country or by a supranational organization. They are rules set by businesses (exporters and im-porters) within the International Chamber of Commerce in order to regulate some aspects of foreign trade operations.

Incoterms do not have the force of law and therefore is not obliged to use them in international trade operations; their use will be conditioned on the acceptance of the parties (seller and buyer) in the sale contract. The strength of the Incoterms is that are widely known and used by different actors in foreign trade (exporters, importers, carriers, freight forwarders, customs brokers, banks and insurance companies, etc.). That is very useful for sellers and buyers to agree on terms of delivery of the goods and that the agreement conforms to rules that are universally known.

Incoterms can be classified according to three criteria that all have to do with trans-port: mode of transport used, payment for the main (international) transport and transfer of risks in transport. In the classification of Incoterms 2010, the prevailing approach is the mode of transport used.


Classification of Incoterms 2010

Mode of transport used (Incoterms for any mode of transport and sea Incoterms)

The first criterion is the mode of transport used. In the version of Incoterms 2010, there are seven Incoterms that can be used with any mode of transport (surface, air or sea) or multiple modes (multimodal). On the contrary, there are four Incoterms that can only be used with sea transport and inland waterways (canals, rivers, lakes).

Incoterms for any mode of transport and multimodal transport:• EXW, FCA, CPT, CIP, DAT, DAP and DDP.

Incoterms, uniquely for sea and inland waterways transport:• FAS, FOB, CFR and CIF.

Payment for the main transport (seller or buyer)

The second criterion of classification is the payment of main transport which is the international transport between the country of origin and the country of destination. The Incoterms distinguish between those terms in which the main transport payment is made by the buyer (importer) and those where it is made by the seller (exporter).

Incoterms in which the main transport is paid by the buyer (importer):• EXW, FCA, FAS and FOB.

Incoterms in which the main transport is paid by the seller (exporter):• CPT, CFR, CIP, CIF, DAT, DAP and DDP.

Transfer of risks in transporting the goods (at origin or destination)

Finally, we should distinguish between those Incoterms in which the obligation to deliver the goods by the seller and, therefore, the transfer of risks in transport occurs in the country of origin, while in others Incoterms the obligation of delivery occurs in the country of destination.

Incoterms with transfer of risks in the country of origin:• EXW, FCA, FAS, FOB, CPT, CFR, CIP and CIP.

Incoterms with transfer of risks in the country of destination:• DAT, DAP and DDP.

In the case of Incoterms in “C” (CPT, CFR, CIP and CIF) should be noted that, al-though the seller will be paying international transport to the country of destination,


the risks of transport are transferred in the country of origin when the goods are loaded on the means of transport. Hence in the Incoterms CIF and CIP, which incorporate a compulsory insurance transport, it is the seller who hires and pays the insurance, although, the beneficiary of insurance is the buyer who bears the risks of transport.

Classification of Incoterms 2010

Acronyms IncotermMode of transport

Payment of main

transport

Transfer of risks in transport

EXW

FCA

CPT

CIP

DAT

DAP

DDP

Ex Works

Free Carrier

Carriage Paid To

Carriage and Insurance Paid To

Delivered At Terminal

Delivered At Place

Delivered Duty Paid

Any mode

Any mode

Any mode

Any mode

Any mode

Any mode

Any mode

Buyer

Buyer

Seller

Seller

Seller

Seller

Seller

Origin

Origin

Origin

Origin

Destination

Destination

Destination

FAS

FOB

CFR

CIF

Free Alongside Ship

Free On Board

Cost and Freight

Cost, Insurance and Freight

Sea

Sea

Sea

Sea

Buyer

Buyer

Seller

Seller

Origin

Origin

Origin

Origin

Main changes in Incoterms 2010

The Incoterms 2010 have made some significant changes in relation to the previous version of Incoterms 2000. These changes include both the elimination and creation of new terms, modification of certain uses in the existing terms and adapting the rules to the operational logistics, Internet communications and security procedures that have been implemented at the borders of countries.


Below, we offer a brief description of the major changes. The effects of such changes on foreign trade operations are discussed in detail in the sections devoted to each Incoterm.

Reduction from 13 to 11 terms

In relation to the Incoterms 2000, the 2010 version eliminated four terms: DES (De-livered Ex Ship), DEQ (Delivered Ex Quay), DAF (Delivered At Frontier) and DDU (Delivered Duty Unpaid). These Incoterms had little use: in the case of DES and DEQ for certain sales of bulk goods that are delivered to the ports of destination; DAF in deliveries at frontiers with some difficulty, where is better that the buyer takes over of import procedures; and in the case of DDU what has actually occurred is a renaming, because the new DAP Incoterm establishes obligations very similar to DDU. However, it should be noted that the four Incoterms that have been eliminated can still be used by exporters and importers since the Incoterms 2010 rules do not repeal Incoterms 2000 rules. Moreover, if a company prefer to use Incoterms 2000, they should refer to this version in the sale contract, mentioning the expression “Incoterms 2000” after the place of delivery (e.g. DAF USA/Mexico border at Laredo, Texas, USA, Incoterms 2000).

New terms in Incoterms 2010

DAT replaces DES, DEQ y DAFDAP replaces DDU

Incoterms 2010 created two new Incoterms: DAT (Delivered At Terminal) and DAP (Delivered At Place). The first replaces the three Incoterms DES, DEQ, and DAF, when the merchandise is delivered to the destination country in a terminal or trans-portation infrastructure (port, airport). DAP has a function very similar to DDU, as noted above.

Priority for Incoterms used with any mode of transport in comparison with sea Incoterms

The new classification of Incoterms 2010 do not take into account the main criterion of the distribution of costs between seller and buyer, but the mode of transport used: Incoterms for any mode of transport against sea Incoterms. The Incoterms 2010 rules give priority to the Incoterms for any mode of transport because they fit better with the reality of international logistics.

Goods in containers only for Incoterms for any mode of transport but not for sea Incoterms.

This is perhaps the most significant change in Incoterms 2010. If the goods are loaded into a container, the Incoterms 2010 clearly state that sea terms should not be used,


even if the delivery takes place in a port. The reason is that containers are delivered to the port terminals, before being placed on board of the ships. When the goods are transport in containers should not be used FOB, CFR or CIF, but their equivalents for multimodal transport, which are respectively FCA, CPT and CIP.

This is a big change from the uses and habits that came into force until now. We must remember that the FOB and CIF Incoterms are the oldest and most widely used in foreign trade since a large proportion of goods are transported by ship and it is also common that deliveries be made in ports. Therefore, it is expected that the adapta-tion of exporters, importers, carriers, freight forwarders, etc., to their modification of Incoterms 2010 will be slow, and for a time will be common to use FOB, CFR or CIF even when goods travel in containers. In the event that the seller or buyer use sea Incoterms with container transport it is advisable to ask about switching to any mode of transport Incoterm (such as FCA, CPT or CIP) to match what is the right used according to Incoterms 2010 rules.

Transfer of risks “on board” in Incoterms FOB, CFR and CIF

In Incoterms 2010, when using the sea terms FOB, CFR and CIF, the transfer of risks occurs when the goods are “placed on board” in the port of shipment. However, in Incoterms 2000, the risk passes when the goods “pass the ship’s rail”.

While the version of Incoterms 2010 is not so clear, it is understood that “on board” includes only the load (up the goods to the ship). The other two operations required to place goods in a ship: stowage (place the goods in the ship’s hold or deck) and lashing (tying to impede the goods from moving during the journey) are on the ac-count of the buyer. Although Incoterms 2010 do not mention it explicitly, it could be interpreted that risks of loading is bear by the seller while the risks of stowage and lashing are bear by the buyer.

Delivery “by procuring the goods so delivered” for sales that occur during shipping

In the foreign trade of certain products (bulk, commodities, fuel) sometimes the sale of goods take place during the journey of the ship, from the shipment port to the des-tination port, once the goods have been shipped. To cover these situations, Incoterms 2010, only in sea Incoterms FOB, CFR and CIF state that the delivery can be made “on board” or “by procuring the goods so delivered”, i.e. once it has been shipped.

For example, in a sale contract which has established itself as the place of delivery “CIF port Lagos, Nigeria - Incoterms 2010”, the buyer can sell the goods to a third party during the journey between the port of shipment and the port of destination. Although the buyer has not shipped the merchandise, it fulfills the obligation to deliver “by procuring the goods so delivered” to the new buyer.


Allocation of terminal costs

When using Incoterms in which the seller pays the main transport –such as CPT, CFR, CIP or CIF–, the seller includes in the purchase price the cost of transport to destination including the costs of terminal –what is known as THC (Terminal Han-dling Charges)–. However, it happens that most of the transport companies carry the cost of terminal, in particular the discharge of goods on the buyer and, therefore, they pay twice for the same service. To avoid this duplication, Incoterms 2010 establish that the terminal costs should be allocated according to the stipulations of the transport contract. They also state that if the seller bears the costs of discharge at destination port, according to the stipulations in the transport contract, they shall not be entitled to demand the buyer the return of the costs unless otherwise agreed.

Transport insurance coverage in CIP and CIF

In Incoterms CIP and CIF in which the seller is obliged to contract a transport insur-ance of goods from the place of delivery to destination, the Incoterms 2010 refer to the latest version of the coverage Insurance of Institute Cargo Clause in London. These covers are the result of the agreement IUA / LMA (Underwriting International Asso-ciation of London and Lloyds Market Association) which came into force in January 2009. There are three types of coverage: Clause C (minimum), Clause B and Clause A –besides, Clauses of War and Strike can be added within the Clauses–. According to Incoterms 2010, in Incoterms CIP and CIF, the seller is required to hire only minimal coverage (Clause C). If the buyer wanted a larger coverage, he shall require the seller to contract it, but its cost will be borne by the buyer. In the rest of the Incoterms, neither party is obliged to take out transport insurance, but are required to provide to the other party the necessary information for obtaining the insurance.

Security-related information

Since the attacks of September 11, 2001 various measures to ensure the safe trans-port of passengers and goods were put in place. Following these practices, Incoterms 2010 version establishes the obligation of the seller to assist the buyer to obtain all information concerning the safety of the goods or their transportation to their final destination. However, Incoterms 2010 states that any costs resulting from obtaining such information will be borne by the buyer.

Validity of electronic messages and documents

Incoterms 2010 granted the same validity to the messages and documents transmitted electronically to those that are supported on paper, if it is agreed by the parties or is a common practice. The use of electronic means facilitate the obligation to notify the parties with different information (place of delivery or receipt, date, name of carrier, etc.) and the transmission of documents relating to export and import formalities.


Main changes in Incoterms 2010

International and national use

Although Incoterms are in the peculiarities of foreign trade, the 2010 version refers to its use also for domestic trade. This new approach regarding the scope has two justifications: first, there are areas of economic integration (such as the EU) that have the consideration of “domestic” market when customs disappeared. On the other hand, the internal regulations in the U.S. terms of trade –known as RAFTD (Revised American Foreign Trade Definitions)–, no longer in force, are expected to be replaced by Incoterms, both in internal operations between U.S. companies and in foreign trade operations between U.S. companies and companies in other countries.

Aspects of foreign trade that Incoterms do not regulate

Although Incoterms regulate many aspects of foreign trade, there are others on which they do not have influence. Among them: trade in services, ownership of the goods or the payment deadline:

Trade in services:• Incoterms are only used in international sales of goods (tan-gible products) and do not apply to trade in services (intangibles) as in this activity there is no physical delivery, or need for logistics and customs clearance; therefore Incoterms rules do not apply.

Ownership of the merchandise:• the transfer of ownership of goods is gov-erned by the contract of sale and performed normally on payment of the price; therefore, is not affected by Incoterms rules. The text of Incoterms 2010 never


used the expression “transfer the ownership of the products” when defining the obligations of delivery of the goods by the seller, Incoterms rules use expressions such as “deliver the goods” or “made available to… ”. The “Obligations of the buyer” section explicitly mentions that “the buyer must pay the price established in the sale contract”.

Deadline for payment:• the payment period is also established in the international sale contract and may be paid in advance (before delivery), payment in cash (co-inciding with the delivery) or payment on credit (after delivery). In this sense, neither of these three alternative is affected by the Incoterms agreed upon.

In addition to these three aspects, Incoterms do not deal with other issues such as warranties, grounds for termination of the contract or sue for damages that should be resolved through the sale contract and according to the law to which the contract is submitted.

Variants of Incoterms

The practice of foreign trade has meant that sometimes the exporters and importers add a term or expression to Incoterms in order to clarify the distribution of costs and risks between the parties. It should be noted that the Incoterms 2010, unlike previous versions, do not mention any of these variants. However, it remains appropriate in certain circumstances of international operations to mention three variants that should eventually be used:

EXW loaded:• the loading –and therefore the risks– of the goods in the first transport (usually truck) that are paid by the seller. Normally, when using EXW it is the seller who makes the load on the first transport and therefore, this variant corresponds more to reality than the rule EXW in which the costs and risks of loading in the first transport are borne by the buyer.

CIF maximum cover:• for the benefit of the buyer, the seller contracts insurance coverage of international transportation with Clause A of the Institute Cargo Clauses (ICC), plus a Strike Clause and a War Clause. The cost of this additional coverage is not very significant in relation to the risks they cover, so in some high-risk countries, it is advisable to hire them.

DDP VAT unpaid or DDP VAT excluded:• the seller bears the costs of import clearance but without accounting for VAT. Incoterms 2010 specifically mentions this possibility because of difficulties in recovering the amount that the seller has to pay in concept of VAT on the value of the goods at the destination country.

In any case, when using some variant of Incoterms rules should be clearly specified in the sale contract how the costs and risks covered by the variant are allocated between buyer and seller.

WHAT ARE INCOTERMS USED FOR?

WHAT ARE INCOTERMS USED FOR?16

What are Incoterms used for?

Incoterms arise from the need for exporters and importers to agree on a number of issues related to international operations. Hence, the International Chamber of Commerce has developed rules that govern the obligations in regard to the delivery terms in an international sale.

Specifically, the purpose of Incoterms is to define with precision:

• Where the goods are delivered.

• The documents and customs formalities necessary for export and import proce-dures.

• The transmission risks in transporting the goods.

• The allocation of logistics costs between seller and buyer.

The place of delivery

The first function of Incoterms is to define precisely the place of delivery of the goods and if it comes loaded or ready for discharge from the transport vehicle (truck, plane, ship, train).

Following the three initials in capital letters of each Incoterm must be included as accurately as possible:

• The specific location where the goods are delivered: address of the seller or buyer, the center of transportation, logistics platform, terminal, pier, port, airport, etc.

• The town (province, state) where the goods are delivered.

• The country where the goods are delivered.

It is important to mention the town and the country of delivery as the world’s geog-raphy is so vast and is not always easy to locate a town in a country.

According to Incoterms 2010, in the event that a specific location for delivery of the goods were not designated and there are several possible –for example a company with different locations in a same town– the seller may choose the one that suits him better. After de country, must be included the expression “Incoterms 2010” to reflect that the latest version published by the International Chamber of Commerce is being used.


When choosing the place of delivery it is necessary to take into account the correct and most common of each Incoterm, distinguishing between Incoterms for any mode of transport (including multimodal transport) and those that can only be used with sea transport.

In EXW, normally the place of delivery is the seller’s premises so it is advisable to include the exact address to which refer to the carrier (usually truck) that sends the buyer to collect the goods.

In FCA delivery may be in the seller´s premises or, more commonly, in a facility or transport infrastructure such as a transportation hub, logistics platform, airport or port, always in the seller’s country. If it is a multimodal transport in which the goods travel in containers is advisable to identify the place of delivery as the container ter-minal at the logistics facility.

For CPT and CIP Incoterms delivery locations are varied, always in the buyer’s coun-try, once the international voyage has been made. Could be the buyer’s premises in the case of a country that does not need to pass customs or a facility or transport infrastructure. If the goods travel by ship and container, the most common practice is that the goods will be delivered at the port’s container terminal in the country of destination. In that case, the costs of unloading the goods from de ship, usually are bear by de seller.

Where Incoterms in “D” are used, the place of delivery is the buyer’s country. In the case of DAT, a terminal of a transportation center, airport, port, and in the case of DAP and DDP, usually the buyer´s premises; in DAP without making customs clear-ance and in DDP with customs clearance performed.

In sea Incoterms the place of delivery is always a port. It can the port of shipment (FAS and FOB) or the port of destination (CFR and CIF). In the case of FAS the delivery is on the dock of the port, so if advisable to include the number or name of the dock. In Incoterms FOB, CFR and CIF delivery is made once the goods are placed on board of the ship so it is sufficient to name the port of shipment (in FOB) or destination (CFR or CIF).

In addition to the place of delivery, Incoterms also regulate how to deliver the goods. There are three alternatives:

• Ready for download in the place of delivery (e.g. FCA).

• Loaded in the transport medium (e.g. CIP).

• Unloading from the transport medium (e.g. DAT).

Full information on the obligations of loading and unloading of goods in Incoterm is available in the section devoted to each of them.


Examples of correct use of Incoterms 2010

INCOTERMS FOR ANY MODE OF TRANSPORT

EXW Ridge Manufacturing Inc., Chicago, United States, Incoterms 2010

EXW 31 Constitution Hill, Birmingham, Great Britain, Incoterms 2010

FCA Logistics Platform of Lyon, France, Incoterms 2010

FCA Cargo Terminal, Frankfurt-Hahn Airport, Germany, Incoterms 2010

FCA Delta Terminal, Rotterdam Port, Netherlands, Incoterms 2010

CPT Budapest Logistic Center, Hungary, Incoterms 2010

CPT Container Terminal, port of Tampico, Mexico, Incoterms 2010

CPT Delmonte Srl. Warehouse, Milan, Italy, Incoterms 2010

CIP Air Cargo Terminal, Tianjin Airport, China, Incoterms 2010

CIP Container Terminal, Port of Santos, Brazil, Incoterms 2010

CIP Baupart GmbH Factory, Munich, Germany, Incoterms 2010

DAT Logistics Platform Bursa, Turkey, Incoterms 2010

DAT Cargo terminal, Toronto Airport, Canada Incoterms 2010

DAT Container Terminal 5, Hong Kong Port, China, Incoterms 2010

DAP Udalex Doors Factory, Bucharest, Romania, Incoterms 2010

DAP Alsnögatan 31, Stockholm, Sweden, Incoterms 2010

DDP Hampton & Stevens Ltd. Warehouse, Sidney, Australia, Incoterms 2010

DDP Adetepe Sitesi 24, Istanbul, Turkey, Incoterms 2010

SEA INCOTERMS

FAS port of Bremen, Germany, Incoterms 2010

FOB port of Miami, United States, Incoterms 2010

CFR port of Saint Petersburg, Russia, Incoterms 2010

CIF port of Madras, India, Incoterms 2010


Documents and customs procedures

The second function of Incoterms is to regulate who (exporter or importer) shall get the documents that are generated in the trade transaction. In these documents can be distinguishes the document used to proof the delivery of goods and any other docu-ments necessary for customs clearance.

Documents to proof the delivery of goods

The seller must obtain a document that justify for commercial purposes, legal com-pliance and payment, the obligation to deliver goods to the buyer –is what is called POD (Proof of Delivery)–. It is really important to know what kind of document shall be used to justify the delivery, especially if the means of payment is a letter of credit and the payment is made upon delivery of the documents required at the is-suing of the letter.

There are basically two types of documents to justify delivery:

• Delivery receipts of the carrier: are used in Incoterms EXW, FCA, DAT, DAP and DDP. Must be signed by the buyer´s carrier (e.g. FCA) or by the buyer himself (e.g. DDP).

• International transport documents: are used in Incoterms FOB, CPT, CIP, CFR and CIF. The document will depend on the type of transport used:

• Land: Consignment note CMR.

• Sea: Bill of Lading B/L.

• Air: Airway Bill AWB.

• Train: Railway Bill of Lading CIM.

• Multimodal: Multimodal bill of lading FBL.

Incoterms 2010 establish that the seller is obliged to provide all necessary assistance to the buyer, upon request and on his behalf, to obtain a transport document proving the delivery. When this document is negotiable and issued in several originals (e.g. Bill of Lading B/L) the seller must give the buyer a full set of originals. In Incoterms CIP and CIF the seller is obliged to obtain a transport insurance for the buyer. Therefore, to justify the delivery, in addition to providing a transport document, the seller must also give the buyer a copy of the insurance policy or the certificate of transport.

Documents for customs clearance

Incoterms also regulate which of the parties (seller or buyer) should obtain the docu-ments for customs clearance in the countries of origin and destination. These docu-


ments include: export and import SAD (Single Administrative Document), Declara-tion of Value, licenses and authorizations, certificates, etc.

The following table shows who is responsible for obtaining such documents for import and export and import. In EXW the buyer has to make both of them, while in DDP the seller who is responsible for both. In the rest of Incoterms, export clearance is done by the seller and import clearance by the buyer.

Customs procedures according to each Incoterm

Mode of

TransportIncoterm

Export

Clearance

Import

Clearance

A

N

Y

M

O

D

E

EXW

FCA

CPT

CIP

DAT

DAP

DDP

Buyer

Seller

Seller

Seller

Seller

Seller

Seller

Buyer

Buyer

Buyer

Buyer

Buyer

Buyer

Seller

S

E

A

FAS

FOB

CFR

CIF

Seller

Seller

Seller

Seller

Buyer

Buyer

Buyer

Buyer

In any case, regardless of who is responsible for carrying out customs formalities, the other party must provide full assistance at the risk and cost of the party that must obtain the documents necessary for customs clearance. Thus, for example in EXW, the seller must help the buyer to obtain the documents necessary for export clearance, while in the case of DDP the buyer is obliged to help the seller getting the documents for import clearance.



The third function of Incoterms is to determine where the risk is transferred from seller to buyer. It must be clarified that his is the risk of transport due to damage, loss, strikes, war, etc., during the transport of goods, not the commercial or payment risk that has to do with the transmission of ownership of the goods and payment, issues not regulated by the Incoterms.

There are two possibilities: transfer the risk in the country of origin (seller’s country) or in the destination country (buyer´s country):

• Transfer of risks in origin: in EXW, Incoterms in “F” (FCA, FAS and FOB) and Incoterms “C” (CPT, CIP, CFR and CIP) the risk are transferred where the seller delivers the goods to the first carrier in the chain (Incoterms for any mode of trans-port) or in the port of shipment (sea Incoterms) always in the country of origin.

• Transfer of risks at destination: in Incoterms in “D” (DAT, DAP and DDP), the risk are transferred when the seller delivers goods at the designated place –normally logistics infrastructure (DAT ) or buyer´s premises (DAP or DDP)– in the country of destination.

Transfer of risks in transport according to each Incoterm

Mode of

TransportIncoterm Transfer of risks

A

N

Y

M

O

D

E

EXW

FCA

CPT

CIP

DAT

DAP

DDP

Origin

Origin

Origin

Origin

Destination

Destination

Destination

S

E

A

FAS

FOB

CFR

CIF

Origin

Origin

Origin

Origin


Allocation of logistics costs

In addition to these functions, the fundamental objective of Incoterms is to define cost sharing between seller and buyer in an international sale, in particular the rules on Incoterms 2010 define precisely who bears the costs of each of the logistical opera-tions both in origin and destination.

To understand the distribution of logistics costs it is necessary to take into account that the rules of Incoterms are made from the seller´s point of view. When progress is made through the classification of Incoterms, costs borne by the seller increase in relation with those supported bay de buyer. For example, in EXW the seller assumes only the costs of packaging and checking he goods, while in DDP assume all costs except unloading the goods at the place of destination.

Costs can be divided into 11 concepts, 5 of them in origin, 2 international and 4 at destination.

Sequence in allocation costs between seller and buyer

Place Concept

Country of origin

1. Packaging and checking

2. Loading in seller´s premises

3.Transport in country of origin (pre-carriage)

4. Customs clearance (export)

5. Terminal charges in origin

International6. Main transport

7. Transport insurance

Country of

destination

8. Terminal charges at destination

9. Customs clearance (import)

10. Transport in country of destination (on-carriage)

11. Unloading is buyer´s premises

Package and checking

In all Incoterms costs of packaging and checking are supported by the seller. Thus, prior to quote, the seller should ask the buyer if the goods have to take some special packaging due to weather issues, resistance to certain forms of transport, etc. If that were the case, the seller must include the additional cost of such packaging in the price. Package defects are the leading cause of loss in the international trade and are not covered by transport insurance.


Loading in origin and unloading at destination

The load of the goods in origin and the uploading at destination are concepts that carriers do not usually listed separately in groupage operations, but only when it comes to full loads or general cargo.

Typically, the load in origin is made by the seller, though that practice goes against the Incoterm EXW in which the goods are delivered ready for loading. In groupage, truck drivers may have some means to load the cargo (boxes, pallet) to the truck but when it is a full container the driver has no means to upload it to the truck. So if the seller prefers to do the load on the first carrier is preferred to use FCA rather than EXW.

As for the unloading at destination, is normally made by the buyer in accordance with Incoterm DDP in which the goods are delivered ready for unloading.

Transport in country of origin and destination

Transport in the country of origin (pre-carriage) includes transportation of goods from the seller’s premises to the place of delivery in the country of origin that can be a transportation hub, port, airport, etc. Some companies have their own means of transport (trucks, vans) and do it for themselves, although it is usually to outsource pre-carriage to a transport company. Although there are not great distances and there-fore the cost is not very high, when preparing a quotation in any Incoterm, except EXW, the seller has to include the costs of pre-carriage in the price and, therefore, must request a quote to transport companies.

Transport in the country of destination (on-carriage) consists in bringing the goods from the place where international transport delivers then to the buyers premises. For doing that, the seller must hire and pay for services of a transport company in the country of destination and probably will have difficulties to recover indirect taxes on contract logistics services, having no tax resident in the country.

Terminal charges in countries of origin and destination

The costs of handling the goods, both at origin and destination, will depend on the transport contract. These costs are called THC (Terminal Handling Charges) and may be important, especially when using sea transport.

To avoid duplication in the charge of these costs –i.e. not charged them to the buyer and seller simultaneously– it is necessary to make a contract of carriage that fits the Incoterms agreed in the sale contract.

As regards the costs of cargo handling in the country of origin, in the case of FCA these costs should be incorporated into the price the buyer pays for the freight of


international transport. In the case of FOB are borne by the seller because the goods are placed “on board”.

As for the costs of handling at destination, when using Incoterms in “C” (CPT, CFR, CIP or CIF) is the seller who pays the freight and, therefore, who should include or not handling costs at the port of destination.

To determine who bears the costs of handling at origin and destination are different forms of freight services ranging from FIO (Free In and Out) that does not include expenses or load or unload, until Liner Terms (Berth to Berth) where the loading/stowage (at the port of loading) and unstowage/unloading (in the port of destination) are included in the freight.

Types of freight services

FIO (Free In and Out): freight cost does not include loading or unloading.

FILO (Free In, Out Liner): the loading and stowage are for the account of the goods and the

unloading and unstowage for the account of the carrier. Most appropriate option for FOB.

LIFO (Liner In, Free Out): the loading and unstowage are borne by the carrier and

unloading and unstowage by the account of the goods account. Most appropriate option

for “C” terms (CPT, CFR, CIP and CIF) when the goods are delivered at destination port

without unloading.

LINER TERMS (Berth to Berth): the loading, stowage, unloading and unstowage are included

in the freight. Most appropriate option for the terms “C” and DAT when you the seller want

to deliver the goods unloaded at the container terminal at the port of arrival.

Main transport

Main transport is the one that takes place between the place of delivery in the country of origin and the country of destination and usually is the most important logistical costs of all governing Incoterms. Therefore, the parties should request quotes and explore various alternatives with different carriers and freights forwarders to see which of them is getting more competitive prices.

In Incoterms EXW and “F” international transport is hired by the buyer, while in the Incoterms in “C” and “D” is hired by the seller. It is usual for parties to request quotes to their carriers, both in origin (EXW or “F”) or at destination (“C” or “D”) in order to evaluate the different offers they receive and choose the best suited at that time and for that particular operation.


Customs clearance (export and import)

Among the costs regulated by Incoterms are the export clearance in the customs of country of origin and the import clearance at the point of entry in the country that imports the goods.

Incoterms EXW is the only one in which both, export and import clearances are made by the buyer. In contrast, DDP is the only Incoterm in which both clearance are performed by the seller. In the rest of Incoterms, export clearance is carried out by the seller and import clearance by the buyer.

The cost of these procedures include customs clearance and the payment of taxes on imports, mainly tariffs. It also includes the payment of VAT.

Tariffs are taxes levied on the value of the goods through customs in the importing country. Usually they are Ad Valorem, i.e. a percentage of the value of the goods. In most of the customs laws that value includes the cost of transport to the country of entry, that is tariffs are applied to Incoterms in “C” (cost of goods + freight to the destination country). There are also specific duties that involve the payment of a fee for each unit (kilos, tons, liters, hectoliters, square footage, etc.) that is imported (i.e. 0.05 € per liter or 250 € per ton).

Transport insurance of goods

Only in Incoterms CIP an CIF the seller is obliged to purchase insurance for the buyer to transport the goods from the place of delivery to the destination. In the rest of the Incoterms neither party is obligated to purchase insurance, although they are obliged to provide the other party the information to purchase it.

Whether or not required to purchase insurance in the agreed conditions, it is advisable that the party assuming the risk in the international transport do it. Purchase can be done through one’s own carrier or forwarder, or directly with an insurance company that offers transport insurance policies. The cost of the policy depends on the type of transport, goods and, destination country but normally do not exceed a low percent-age of the value of goods, about 0,5%.

To confirm that the insurer has contracted the insurance, seller or buyer should apply for a certificate of insurance including data of the operation such as insure and the insured’s name, goods, insured value, voyage, coverage and premium.


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OBLIGATIONS OF THE

SELLER AND THE BUYER

OBLIGATIONS OF THE SELLER AND THE BUYER28EX

W

Costs

Risks

Docs.

EXWEx Works (named place of delivery)

HOW TO USE EXW

EXW is the Incoterm that represents the minimum obligations, costs and risks for the seller, as he delivers the goods at his own premises (factory or warehouse) in his country. Not even the seller is responsible for loading the goods onto the first carrier (usually truck) that sends the buyer to pick them up. It is the only Incoterm in which the seller does not clear the goods for export, when such clearance is applicable.

On the contrary, with EXW, the seller offers the lowest service of all Incoterms and represents a loss of competitiveness in comparison with other companies that assume part of international logistics.

This term is suitable for exporting firms with little international experience and who make groupage operations (boxes, pallets) in which the buyer sends a truck to collect the goods at the seller’s premises. When sending full containers, it is better to use FCA, as usually the seller makes the loading of the container on the truck sent by the buyer to the seller’s premises.

It is not advisable to use EXW regularly because when the seller delivers the goods in its own country, normally it is preferable to use FCA.


W

EXW MAIN CHARACTERISTICS

Mode of transport

EXW can be used with any mode of transport (land, sea, air) and specially with multimodal transport (containers).

Place of delivery and reception of goods

Normally when using this Incoterm, the place of delivery of the goods are the seller´s premises (factory or warehouse). If the seller has several places in different locations he should specify in which of them will the goods be delivered. If the sales contract has not established a specific place and there are several possible points of delivery, the seller can choose the one that suits him better.

The buyer is required to collect the goods at the agreed place and date, if the seller has properly notified him in due time.

Loading/unloading of goods

The seller delivers the goods to the buyer at the named place of delivery, but without being loaded into the first carrier (usually truck). Therefore, the loading on the first carrier is at the risk of the buyer.

Delivery document

The seller has no obligation to justify the delivery of goods to the buyer with any type of document, as it is the buyer who sends a transport (usually truck) to collect the goods at seller´s premises.

The delivery document used is a delivery note of the carrier who has been sent by the buyer to the seller’s premises or in the case of multimodal transport, a FCR FIATA certificate issued by the forwarder, hired for the buyer, with information that has been previously provided by the seller.

Documents for export/import procedures

The seller has only the obligation to provide the buyer with the commercial documents accompanying the goods (invoice and packing list). However, the seller should help the buyer to obtain other documents necessary for the export operation such as licenses, permits, certificates, etc.; the cost of obtaining these documents is borne by the buyer.

Furthermore, the seller must provide the buyer with any information and help in obtaining any documents necessary to complete the formalities for import into the


W

country of destination and also those documents relating to security in the transport of the goods from the delivery place to the final destination. The buyer must pay the seller for expenses made to obtain such information and documents.

Transport documents (carriage of goods by road CMR, bill of lading B/L, air waybill AWB, railway bill of lading CIM and FIATA bill of lading FBL) shall be obtained by the buyer.

If the parties agree or if it was normal practice, the seller can provide the documents to the buyer using electronic procedures.

Transport contract

Neither party has the obligation to the other to make a contract of transport. In any case, transportation, either by their own means or by contract, is done by the buyer who is the one that bears the costs and risks of transporting the goods from the place of delivery at the seller’s country to the final destination.


The risk in transporting the goods is transferred from seller to buyer at the time of delivery, i.e., before the goods are loaded on the first carrier (usually truck). There-fore, the risk in the operation of loading the goods on the first carrier is assumed by the buyer.

To transfer the risk, it is necessary that the goods transported can be identified and individualized as the goods object of the sale contract. Also, the seller must notify the buyer in a reliable way that he has put the goods at his disposal at the place of delivery.

Insurance contract

Neither party has the obligation to make a contract of insurance for transporting the goods. However, it is advisable that the buyer hires insurance transport, at least to cover the international transport of goods. In this sense, the seller must provide the buyer with any information necessary to enable him to hire the insurance he needs.

Inspection of goods in the country of origin

The costs of any mandatory inspection of the goods prior to shipment are paid by the buyer, even when such inspection is required by regulations or institutions in the country of the seller.


W

Export and import customs clearance

All procedures, costs and taxes of both, export and import clearance, are borne by the buyer.

Allocation of costs between seller and buyer

The seller assumes only the cost of packaging, checking and marking of goods, accord-ing to usual practices in international trade. He also assumes any specific requirements on the packaging that have been included in the sale contract.

All other operating and logistics costs are borne by the buyer:

• Loading of the goods at the first carrier.

• Inland transportation (pre-carriage) to transport center, port, airport, in seller´s country.

• Costs and taxes of export clearance.

• Terminal costs (warehousing, handling, loading) in transport center, port, airport, in seller´s country.

• Main transport to the country of destination.

• Insurance transport (if it is hired).

• Terminal costs (unloading, handling, warehousing) in transport center, port or airport, in buyer´s country.

• Costs and taxes of import clearance.

• Inland transportation (on-carriage) from the transport center, port, airport, to the buyer´s premises.

• Unloading of goods on buyer´s premises.

Methods of payment

EXW shall be used with no documentary methods of payment such as payment in advance, cash on delivery, open account or check. Is not suitable for documentary methods (letter of credit or documentary credit) because the seller does not have a transport document (CMR, B/L AWB, FBL) that justify the delivery of the goods at the agreed conditions and therefore be included as documentation of the letter of credit.


W

Moreover, if the letter of credit requires a transport document to justify delivery and the buyer does not send a carrier to collect the goods from the seller´s premises, the seller will not be able to make effective the credit because he will not have the required delivery document.

When using documentary methods of payment (letter of credit or documentary credit) it is better use Incoterms in “F” or “C”.

PRACTICAL ADVICE TO USE EXW

EXW is the first Incoterm out of the eleven and the one that implies fewer obligations to the seller; he only has to deliver the goods at his own premises and the buyer will send a carrier to collect them.

EXW allows the seller to give the lowest price quotation and not assume the costs and risks in international operations management. In this sense, the seller may quote prices immediately, without having to make any calculations about the costs of the export operation: it is like a sale in the local market.

In contrast, EXW means the less service given by the seller and requires the buyer to assume full logistics management. Seller´s commercial offers will lose competitiveness in relation to those of other providers that includes international logistics management among the services offered.

In EXW, companies with a certain volume of international business, will not get certain discounts and preferential rates in hiring of international transport. These discounts can represent an additional source of income if they are not applied to final prices, or make the offers more competitive when they are translated to a reduced final price.

As for loading the goods, in the first mode of transportation (usually truck), it must be taken into account that according to the EXW the loading shall be done by the buyer. However, in most cases, the daily experience shows that it is the seller who assumes the cost and risk of loading because the trucks normally do not have means to upload the goods. When the buyer is unwilling to assume, either the cost or the risk of the load on the first carrier, it is better to use other Incoterms, for example, FCA.

EXW is the only Incoterm in which the exporter does not carry out customs formali-ties for the export of goods. In this sense, the seller does not have any document that serves to justify the export of goods. Thus, for purposes of taxation (VAT) or other regulations, the buyer must ask to the customs broker or forwarding agent of the buyer for a copy of the SAD (Single Administrative Documents, issue nº 3) which is the document that demonstrates that the export clearance has been made; the seller can also ask for a transport document (CMR, B/L, SWB, AWB, FBL) as evidence that the goods are exported. If it is an integrated economic area (e.g. the EU) where


W

there is free movement of goods and no customs clearance, to justify the exit of goods from the national territory for VAT purposes, it will be sufficient with a transport document or a carrier’s delivery note signed and sealed by the consignee of the goods in the destination country.

EXW is useful for the following types of international operations:

• First exports of companies that have very short experience and knowledge of international trade.

• International sales between subsidiaries belonging to the same multinational group in which there is full transparency and confidence in the way of operating.

• Sales in an integrated economic area (e.g. the EU), where there is free movement of goods without customs clearance.

• Groupage operations of small volumes where the buyer sends a carrier to the seller´s premises to collect and load the goods in the truck (pallets, boxes) with very little costs and risks.

• Full load operations (full container or truck) in which there is a single transport document for the whole journey, and where it is not necessary to carry out cus-toms clearance since the goods are sent to a zone of countries (e.g. the EU) in which there is a system of free movement of goods. However, in the cases where the goods are loaded by the seller on a truck sent by the buyer, it is preferable to use FCA.


W

KEYS TO EXW

Mode of transportAny type of transport (land, air, sea), including multimodal

transport (containers).

Delivery place On the premises (factory or warehouse) of the seller.

Loading/unloading of the

goods

Properly packaged and marked, ready to be loaded into the

first carrier (usually truck).

Delivery documentDelivery note or FIATA FCR certificate if multimodal transport

is used.

Type of cargo Any type of cargo, except bulk and heavy loads.

Contract of main transport Buyer.

Contract of insurance

There is no obligation on either party. However, it is

advisable that the buyer purchases insurance because he

assumes the risks.

Transfer of risks in transportAt the time of delivery, before the goods are loaded on the

first carrier in the seller’s premises.

Pre-shipment inspection Buyer.

Export customs clearance Buyer.

Import customs clearance Buyer.

Methods of payment

Payment in advance, cash on delivery, open account, bank

transfer, check. It is not suitable for documentary methods

(letter of credit or documentary credit).

EXW

FCA

35 OBLIGATIONS OF THE SELLER AND THE BUYER

HOW TO USE FCA

FCA is a very flexible Incoterm because it allows the delivery of the goods, both on the premises of the seller and at various points such as transports centers, ports, airports, container terminals, etc., which are located in the country of the seller. Therefore, when using this Incoterm, it is very important to specify clearly the place of delivery.

FCA can be used for any type of cargo (general cargo, full load, groupage) and with different means of payment (open account, bank transfer, letter of credit, etc.).

In the Incoterm FCA, the seller must complete and bear the costs of export clearance and, therefore, is responsible for obtaining the necessary documents for it. The import clearance formalities are performed by the buyer.

When the goods are transported in containers and the place of delivery is the port of shipment, Incoterms 2010 rules advised to use FCA instead of FOB, because the containers are delivered regularly in the port’s container terminal and not loaded into the ship.

FCA is one of the most used Incoterms in international trade and will probably replace EXW for the majority of sales where the seller delivers the goods in its own country and do not want to manage international logistics.

Costs

Risks

Documents

FCAFree Carrier (named place of delivery)

EXW

FCA


FCA MAIN CHARACTERISTICS

Mode of transport

FCA can be used with any mode of transport (land, sea, air) and specially with mul-timodal transport (containers).


The seller delivers the goods to the buyer in two possible locations:

• The seller’s premises (factory or warehouse).

• Somewhere (transport center, terminal, port, airport, container´s terminal) in the seller´s country.

This second alternative is more usual. If the seller has not set a specific place and there are several possible delivery points, the buyer can choose the most convenient for him.

The buyer is required to collect the goods at the place and date agreed, if the seller properly notified him in due time.


When the goods are delivered on the seller´s premises (factory or warehouse), the seller has to load the goods on the first carrier (usually truck).

If the merchandise is delivered at some other point (transport center, port, airport), the seller must deliver the goods ready for unloading and delivery to the carrier that has been designated by the buyer for international transport.

Delivery document

The seller must provide the buyer with a document proving the delivery of the goods in the agreed conditions. This document is usually the delivery note of goods from the carrier hired by the seller to the international carrier or freight forwarder hired by the buyer. The seller must also assist the buyer in order to get the international transport documents.

When the goods are delivered at seller´s premises, the delivery documents is usu-ally a receipt of the carrier sent by the buyer to the seller’s premises. In the case of multimodal transport FIATA FCR, a certificate is issued by the forwarder with the information that has been previously provided by the seller.

EXW

FCA



The seller is obliged to provide the buyer with the commercial documents accom-panying the goods (commercial invoice and packing list). He also has to get all the documents required for export clearance (export SAD, certificates, licenses and au-thorizations, etc.).

Furthermore, the seller must provide the buyer with any information and help in obtaining any documents necessary to complete the formalities for import into the country of destination; and also those documents relating to security in the transport of the goods from the delivery place to the final destination. The buyer must pay the seller for expenses made to obtain such information and documents.

Transport documents (carriage of goods by road CMR, bill of lading B/L, air waybill AWB, railway bill of lading CIM and FIATA bill of lading FBL) shall be obtained by the buyer.


Transport contract

It is the buyer who must hire transportation from the place of delivery (in the seller´s country) to the final destination of the goods. However the buyer can ask the seller to hire the carriage on usual conditions, at the risk of the buyer. The seller may reject the request and in this case, he should inform the buyer as soon as possible.


The risk in transporting the goods is transferred from seller to buyer at the time of delivery: there are two possibilities:

• If the goods are delivered to the buyer on the seller´s premises (factory or warehouse) the risk is transferred when the goods have been loaded in the first carrier (usually truck).

• If the goods are delivered elsewhere (transport center, port, airport) in the country of the seller, the risk is transferred before the goods are unloaded from the first car-rier for delivery to the carrier named by the buyer.

The buyer bears all risks of transport from the moment the goods have been delivered at the agreed place and time if:

• Does not notify the seller the name of the carrier that will pick up the goods.

• The carrier named by the buyer fails to take the goods on the date or deadline agreed.

EXW

FCA


In either of these circumstances, the buyer bears all costs (storage) and risk (loss or damage) in transporting the goods from the agreed delivery date or, if there is no specific date, from completion of the agreed delivery period.

To transfer the risk, it is necessary that the goods transported can be identified and indi-vidualized as the goods object of the sale contract. Also, the seller must notify the buyer in a reliable way that he has put the goods at his disposal at the place of delivery.

Insurance contract



The costs of any mandatory inspection of the goods prior to shipment are paid by the buyer, except when such inspection is required by regulations or institutions in the country of the seller; in this case the costs are borne by the seller.


All procedures, costs and taxes of export clearance are borne by the seller.

All procedures, costs and taxes of import clearance are borne by the buyer.


The seller assumes the following operational costs:

• Packaging, checking and marking of goods.

• Loading the goods at the first carrier.

• Inland transportation (pre-carriage) to transport center, port, airport, in seller´s country.


For its part, the buyer assumes the following operational costs:


EXW

FCA








Methods of payment

FCA can be used with any payment methods (payment in advance, cash on delivery, open account, bank transfer or check) and also with documentary methods (letter of credit or documentary credit). In the case of documentary methods, the seller must ensure to obtain the transport document that justifies the delivery of the goods be-cause it is the buyer who contracts the main transport. For this, the seller must request the carrier or the forwarder hire by the buyer a copy of the international transport document that has been used (CMR, B/L, SWB, AWB or FBL). This document, is usually required to collect the credit as proof of delivery of the goods.

PRACTICAL ADVICE TO USE FCA

FCA is a term that requires more involvement by the seller that EXW, as the seller manages logistics in their own country and performs export clearance; however, both activities do not present excessive complexity and, therefore, any exporting company must be offering quotations, at least, in FCA.

Moreover, FCA is a very flexible Incoterm because it allows different places of deliv-ery of the goods depending on the type of transport used. It is also very suitable for multimodal transport.

There are several alternatives to use FCA, whose election depends on the place of delivery:

• FCA factory or warehouse: it is recommended using this alternative to full load truck or container) as an alternative to EXW. Delivery takes place once the goods have been loaded on the truck, in the seller´s premises, and at his own risk.

• FCA transport center: it is use mainly for groupage. The seller pays the inland transportation (pre-carriage) till delivered the goods to the carrier that has been designated by the buyer at a terminal or transport center. Delivery of goods oc-

EXW

FCA


curs when the truck is located in the loading dock of the international carrier designated by the buyer.

• FCA port or port terminal: it is the most appropriate Incoterm, substituting FOB, when using full containers. The seller is responsible for the transport of the container from its premises to the container terminal at the designated port. The delivery takes place when the truck carrying the goods arrive at the port’s container terminal. All handling operations at the terminal, which are known as THC (Terminal Handling Charges) are borne by the buyer.

• FCA airport: the seller bears the cost of transport from his premises to the airport that has been designated to deliver the goods. It is understood that the goods have been delivered when the vehicle is parked in the loading dock of the assigned terminal. Any further handling will be paid by the buyer.

• FCA railroad: the delivery of goods occurs when the inland carrier that has been hired by the seller puts the truck in the loading dock of the rail terminal.

Incoterm FCA is suitable for companies that have their own transport vehicles (trucks, vans) and export using groupage services; this situations involves little cost and risk to transport the goods (in boxes or pallets) to the place of delivery (transportation terminal, port, air-port). Generally, the place of delivery will not be far away from the seller´s premises.

FCA is useful for the following types of international operations:

• Companies that do not have too much experience in foreign markets and do not want to manage international logistics to deliver the goods in the destination country.

• Exports of full loads (trucks, containers) in which it is preferable that the seller perform the load on the first carrier (usually truck) in its own facilities.

• Exports in groupage for which the seller uses their own transport vehicles to de-liver the goods somewhere (transport center, port, airport) in their own country, usually near his premises.

• Sales in a integrated economic area (e.g. the EU), where there is a free movement of goods and therefore is not necessary clear the goods for export or import.

• Sales to customers in EU countries, but in which the goods will be sent to a third country (a country outside the EU) so it is advisable, for tax purposes, that the seller obtains the documents that justify the exit of goods from the EU.

In short, FCA is a very flexible Incoterm, increasingly used, that will probably replace EXW for most exports in which the seller delivers the goods in their own country and prefers not to manage international logistics.

EXW

FCA


KEYS TO FCA

Mode of transportAny type of transport (land, air, sea) and, specially, multimodal


Delivery place

a) In seller´s premises (factory or warehouse).

b) In different locations (transport center, port, airport) in the

seller´s country.


goods

a) Load in the first carrier (usually truck).

b) Prepared for the unloading in the delivery place.

Delivery document

a) Receipt of the carrier sent by the buyer to the seller´s

premises or FIATA FCR certificate for multimodal transport.

b) Delivery note of goods from the carrier hired by the seller

to the international carrier or forwarder hired by the buyer.

Type of cargo Any type of cargo (general cargo, complete cargo, groupage).



There is no obligation on either party. However, it is advisable

that the buyer purchases insurance because he assumes the

risks.


a) Once the goods have been loaded in the first carrier, at the

seller´s premises.

b) In the delivery place, before the goods are unloaded from

the first transport for delivery to the carrier hired by the

buyer.

Pre-shipment inspectionBuyer, except when the inspection is required by regulations

or institutions in the country of the seller.

Export customs clearance Seller.


Methods of payment

Payment in advance, cash on delivery, open account, check. It

is also suitable for documentary methods (letter of credit or

documentary credit).

EXW

42 OBLIGATIONS OF THE SELLER AND THE BUYERFA

S

HOW TO USE FAS

Incoterm FAS is used only for sea transport. The seller delivers the goods placing them alongside the ship named by the buyer at the agreed port of shipment. The export clearance is done by the seller

This Incoterm is only used for certain commodities and materials that are not packed and cannot be individualized, such as grain, timber, minerals, steel products, etc.; de-livery is done in those ports that have specialized terminals for this type of products. If the goods are carried in containers, Incoterm FCA should be used as containers are delivered at port terminals and not alongside ships.

The export clearance must be done by the seller. Usually, it is necessary to clear the goods before placing them alongside the ship.

When using FAS, the buyer is responsible for loading the goods on the ship. For this reason, the buyer must know very well the practices in the port of shipment because in the case of problems arise there.

Costs

Risks

Documents

FASFree Alongside Ship (named port of shipment)

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FAS MAIN CHARACTERISTICS

Mode of transport

This Incoterm can only be used with sea or inland waterways (rivers, canals, lakes) transport. When the goods are in containers, FCA should be used as containers are delivered in port terminals and not alongside ships.


The seller must deliver the goods alongside the ship named by the buyer in the dock of the designated port of shipment. The delivery should be made on the date or deadline agreed.

For those products (raw materials, commodities, etc.) that can be sold during the transport of goods at sea (afloat), the rules of this Incoterm state that the goods can be delivered “alongside ship” or “providing the goods so delivered”. The latter expression refers to the merchandise that can be delivered after the buyer placed the goods alongside the ship, for example during the voyage to destination port, so that the first buyer can sell the goods to another buyer using the documentation of the first sale.

The goods should be placed in the dock where the ship will dock to perform inter-national transport. The choice of the dock depends on the type of merchandise and the shipping line that is to perform transportation. In this sense, the buyer must notify the seller the name or number of the pier and the name of the ship that will collect the goods at the designated port. If within the port area, the buyer has not indicated a specific place for the loading, the seller can choose the most convenient for delivering the goods.

The buyer is required to collect the goods in the port of shipment and date agreed, if the seller properly notified him in due time.


The goods are delivered alongside the ship, properly prepared to be loaded so that it is accessible to the media (cranes, conveyors belts, etc.), available to the port or to the ship for loading.

Delivery document

The seller must provide the buyer with a document showing the delivery of the goods at the agreed conditions. Normally, this document is the dock receipt issued by the shipping company stating that the goods have been received for shipment. It also

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can be used a mate’s receipt which is a document signed by the First Officer which acknowledges receipt of the goods on board.




Shipping documents (Bill of Lading B/L or Seaway Bill) must be paid by the buyer who is the one that hires sea transport.


Transport contract

It is the buyer who must hire transportation from the port of shipment to the final destination of the goods. However the buyer can ask the seller to contract transport on usual conditions, at the risk of the buyer. The seller may reject the request and in this case, he should inform the buyer as soon as possible.


The risk in transporting the goods is transferred from buyer to seller at the time of delivery, i.e. when the goods are placed alongside the ship, within reach of the media handling of cargo.

The buyer bears all risks of transport from the time the merchandise is delivered in agreed time and place if:

• Does not notify the seller the loading dock, the name of the ship and the precise date of loading, within the agreed period time.

• The ship named by the buyer does not come at the agreed time or cannot take care of the goods.

In either of these circumstances, the buyer bears all costs (warehousing) and risks (loss

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or damage) in transporting the goods from the agreed delivery date or, if there is no specific date, from completion of the agreed delivery period.


Insurance contract











• Inland transportation (pre-carriage) to shipment port in seller´s country.


• Costs in the port of shipment (warehousing, handling).


• Loading in the ship in the port of shipment.

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• Sea transport till the port of destination.


• Terminal costs (unloading, handling, warehousing) in the port of destination.


• Inland transportation (on-carriage) from the port of destination to the buyer´s premises.


Methods of payment

FAS can be used with any payment methods (payment in advance, cash on delivery, open account, bank transfer or check) and also with documentary methods (letter of credit or documentary credit). In the case of documentary methods, it is advisable to use a bill of lading B/L on board (on-board B/L) that confirms the shipment of the goods on the ship. The seller can include in the bill of lading the clause “to order” thereby maintaining possession of the goods until payment occurs. To justify the delivery can also be used a Mate´s receipt.

On the other hand, by having the bill of lading B/L the condition of title to the goods, the carrier or freight forwarder that manages transportation (usually named by the buyer) should give the seller a copy of the bill of landing B/L since he is the owner of the goods. In that sense, the seller will have no problem for presenting at the bank the B/L as a document justifying the delivery and thereby collecting the letter of credit.

PRACTICAL ADVICE TO USE FAS

FAS is an Incoterm that requires the use of sea or fluvial transport and is really only used for international transport of commodities and bulk. The goods can be left on the quay alongside the ship only when there is a specialized port terminal.

When the goods are transported in container FCL (Full Container Load) usually the seller delivers the goods to a carrier at the port’s container terminal and does not place them alongside the ship. Therefore, in these cases the Incoterm FCA should be used instead of FAS.

If the merchandise is grouped with other companies in a container LCL (Less than Container Load), once the shipper has consolidated the container with merchandise of several companies is carried along with other containers to the side of the ship and loaded onto the ship, so neither in these cases can be used FAS, but FCA. Therefore,

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most of the goods except bulk, cannot be left on a dock alongside the ship. If the delivery place is the shipment port, normally the Incoterm FCA is used and if the goods are delivered on board of a ship the Incoterm to be used is FOB.

Sometimes it may happen that the load cannot be in the dock as the ship hired by the buyer have too much depth to dock and is necessary to use barges. In these cir-cumstances, barges will be paid by the seller or the buyer, depending on the customs of the port.

When using FAS, the buyer is responsible for loading the goods on the ship and for this reason must know very well the practices in the port of shipment that is where, if any, there may be problems.

FAS is used mainly for two types of operations:

• Exports by shipping of products such as grain, timber, minerals, fuels, steel prod-ucts, building materials, etc., that are not packaged or individualized.

• Exports by shipping of machinery and equipment being transported by truck till the port. The truck stands on the dock alongside the ship, so that the machine is loaded directly from the truck to the ship.

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KEYS TO FAS

Mode of transportOnly for sea or inland waterway transport. It is not advisable to

use this Incoterm with multimodal transport (containers).

Delivery placeAlongside the ship in the dock of the port of shipment named

by the buyer.


goodsPrepared for loading in the ship designated by the buyer.

Delivery documentDock receipt or Mate´s receipt. When using letters of credit

Bill of Lading B/L with the mention “on-board”.

Type of cargo Bulk, heavy loads and complex loads (machinery).





risks.

Transfer of risks in transportOnce the goods have been placed a disposal of the buyer in

the dock of the port of shipment.





Methods of payment




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49 OBLIGATIONS OF THE SELLER AND THE BUYERFO

B

HOW TO USE FOB

FOB is the oldest Incoterm and together with CIF the most widely used with sea transport. The seller delivers the goods by placing them on board the ship named by the buyer in the port of shipment. The terminal costs and export clearance are borne by the seller.

This Incoterm should be used preferably with bulk, heavy loads and general cargo. Also, in the case of complex goods (e.g. machinery) whose loading on board the ship may involve some risk so it is better that the seller assumes this risk till the loading has been completed and the goods delivered.

When the goods are transported in containers and the place of delivery is the port of shipment, Incoterms 2010 rules advised to use FCA instead of FOB, because the containers are delivered regularly in the port’s container terminal and not loaded on board the ship.

Although FOB has traditionally been one of the most commonly used Incoterms the evolution of sea transport and the importance of logistics as a sales strategy have diminished the use of this Incoterm that is being gradually replaced by other terms like CFR or CIF.

FOBFree On Board (named port of shipment)

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FOB MAIN CHARACTERISTICS

Mode of transport

This Incoterm can only be used with sea or inland waterways (rivers, canals, lakes) transport. When the goods are carried in containers, FCA should be used as containers are delivered in port terminals and not on board of ships.


The seller must deliver the goods on board the ship named by the buyer in the port of shipment. The delivery should be made on the date or deadline agreed. If no specific loading point has been indicated by the buyer, the seller may select the point within the port of shipment that best suits him.

For those products (raw materials, commodities, etc.) that can be sold during the transport of goods at sea (afloat), the rules of this Incoterm state that the goods can be delivered “on board the vessel” or “providing the goods so delivered”. The latter expression refers to the merchandise can also be delivered after the buyer placed the goods alongside the vessel, for example during the voyage to destination port, so that the first buyer can sell the goods to another buyer using the documentation of the first sale.

The buyer is required to collect the goods in the port of shipment and date agreed, if the seller properly notified him in due time.


The goods must be delivered on board of the ship; i.e. the loading on the ship is borne by the seller. This is a relevant difference with respect to the rules of Incoterms 2000, in which the goods were delivered once had passed the ship’s rail, and therefore, the costs and risks of loading on the ship were shared by buyer and seller. According to Incoterms 2010, the loading on the ship should be done entirely by the seller.

Delivery document

The seller must provide the buyer with a document showing the delivery of the goods at the agreed conditions, usually a copy of the bill of lading B/L is used. A mate’s receipt can also be used because is a document signed by the First Officer which acknowledges receipt of the goods on board. The advantage of the latter is that the seller can obtain it directly while in the case of bill of lading B/ L must ask the carrier of the buyer. The carrier is obliged to give the seller a copy of the bill of lading B/ L because constitutes title of the goods and the owner is the seller.

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Shipping documents (bill of lading B/L or seaway bill of lading SWB) must be obtain by the buyer who is the one that hires sea transport.


Transport contract

It is the buyer who must hire transportation from the port of shipment to the final destination of the goods. However the buyer can ask the seller to contract transport on usual conditions, at the risk of the buyer. The seller may reject the request and in this case he should inform the buyer as soon as possible.


The risk in transporting the goods is transferred from buyer to seller at the time of delivery, i.e. when the goods are placed on board the ship named by the buyer in the port of shipment.

The buyer bears all risks of transport from the time the merchandise is delivered in agreed time and place if:

• Does not notify the seller the loading dock, the name of the ship and the precise date of loading, within the agreed period time.

• The ship named by the buyer does not come at the agreed time or cannot take care of the goods.

In either of these circumstances, the buyer bears all costs (warehousing) and risks (loss or damage) in transporting the goods from the agreed delivery date or, if there is no specific date, from completion of the agreed delivery period.

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Insurance contract











• Inland transportation (pre-carriage) to shipment port in seller´s country.


• Costs in the port of shipment (warehousing, handling, loading).

The buyer assumes the following operational costs:

• Sea transport till the port of destination.


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• Inland transportation (on-carriage) from the port of destination to the buyer´s premises.


Methods of payment

FOB can be used with any payment methods (payment in advance, cash on delivery, open account, bank transfer or check) and also with documentary methods (letter of credit or documentary credit). In the case of documentary methods is advisable to use a bill of lading B/L on board (on-board B/L) that confirms the shipment of the goods on the ship. The seller can include in the bill of lading the clause “to order” thereby maintaining possession of the goods until payment occurs. To justify the delivery can also be used a Mate´s receipt.

On the other hand, by having the bill of lading B/L the condition of title to the goods, the carrier or freight forwarder that manages transportation (usually named by the buyer) should give the seller a copy of the bill of lading B/L since he is the owner of the goods. In that sense, the seller will have no problem for presenting at the bank the B/L as a document justifying the delivery and thereby collecting the letter of credit.

PRACTICAL ADVICE TO USE FOB

FOB is the oldest of all Incoterms. Its use is accredited by English merchants in the early nineteenth century. It was create only for sea transport –at that time it was the only means of international transport– and today it also continues its exclusive mari-time use under rules of Incoterms 2010. However, the extensive use of this Incoterm has led sometimes to use FOB with international air transport and when the place of delivery is an airport. This error may be particularly serious if the payment method of the operation is a letter of credit and discrepancies arise in the terms agree in the sale contract.

In this Incoterm, all costs of handling at the port of shipment are borne by the seller. In the language of international logistics this costs are known as THC (Terminal Handling Costs). Though in the THC are included the cost of loading the goods on the ship, this cost is usually charged jointly with the freight cost (paid by the buyer), so to avoid duplication in their collection, buyer and seller should agree on who bears the costs of loading the goods the ship, although, according to Incoterms 2010 rules this cost must be paid by the seller.

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FOB do not fit well with sea transport operations in which the goods are carried in containers, either in FCL (Full Container Load –containers with goods from one sup-plier) or LCL (Less than Container Load– when merchandise of several companies is grouped in a container). When the goods are delivered to the port’s container terminal and then loaded together with other containers Incoterms 2010 rules recommend the used of FCA instead of FOB.

In ships type RO-RO (roll-on/roll-off) were the goods are not really loaded on the ship as they enters directly into the ship through a ramp is more appropriate to use other Incoterms as FCA, CFR or CIF rather than FOB as the goods are not loaded “on board”.

It is advisable to use FOB when the goods are of some added value or delicate handling –such as the case of machinery– because the risk in loading the ship is higher and there-fore it is preferable that the seller controls the loading of goods. If goods are damaged before or during the load on the ship, the seller will be responsible, but if the goods are damaged once the loading has been done, the buyer will bear the damage.

When using FOB, the risk of theft of goods in the port of shipment and the risk of a workers strike are borne by the seller; on the contrary warehousing costs of the goods at the port of shipment due to a delay of the ship that comes to collect them are assume by the buyer.

FOB is useful for the following types of international operations:

• Exports in which the seller has no experience in managing sea transport operations and, therefore, it is preferable that the negotiations and hiring of such transport is done by the buyer.

• Exports in which the buyer can get a price of shipping (freight) cheaper than the seller because of its trading volume or the transport route to be used.

• General cargo operations or large volume of goods traveling by ship but not in containers because in that case FCA should be used.

Although FOB has traditionally been one of the most commonly used Incoterms, the evolution of sea transport and the importance of logistics as a sales strategy have diminished the use of this Incoterm that is being replaced by other terms in “C” like CFR or CIF. Also, due to the recommendations made in Incoterms 2010 rules in order to avoid the use of FOB when the merchandise travels in containers has made that Incoterm FOB will gradually being replaced by Incoterm FCA when delivery takes place in the port of shipment.

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KEYS TO FOB



Delivery placeOn board the ship in the port of shipment chosen by the

buyer.


goodsOn board the ship named by the buyer.

Delivery documentBill of Lading B/L (with the mention “on-board” when using

letters of credit) or Mate´s receipt.

Type of cargo Heavy loads, complete loads or complex loads (machinery).





risks.

Transfer of risks in transportOnce the goods have been placed a disposal of the buyer on

board of the ship in the port of shipment.





Methods of payment




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56 OBLIGATIONS OF THE SELLER AND THE BUYERC

PT

HOW TO USE CPT

In Incoterm CPT the delivery of goods occurs when the seller makes them available to the carrier that he has hired to perform international transport, although the seller also manages and assumes the costs of international transport to the place of destination. Therefore, the point where the risk of transport is transferred (when the goods are delivered to the carrier in the seller´s country) is different from the point till the seller bears the costs of transport (named place of destination in the buyer´s country).

In the event that there are several successive carriers, such as multimodal transport or truck-air or truck-ship, the transport risk passes from the seller to the buyer when the goods are delivered to the first carrier in the chain.

In CPT, unlike Incoterm CIP, the seller has no obligation to hire insurance transport to cover the goods from the place of delivery to destination.

In this Incoterm, the seller has to complete the formalities and bear the costs of cus-toms clearance for export, not the import clearance that corresponds to the buyer.

CPTCarriage Paid To (named place of destination)

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CPT MAIN CHARACTERISTICS

Mode of transport

CPT can be used with any mode of transport (land, sea, air), including multimodal transport (containers).


The seller fulfills the obligation to deliver when he makes the goods available to the carrier that he has hired in the place he has chosen, usually in their own country. If seller and buyer did not agree on a specific place of delivery, the seller may choose the one that best suits them. The delivery should be made on the date or deadline.

If there were several successive carriers transporting goods to the destination, it is un-derstood that the obligation to deliver is fulfilled when the goods have been delivered to the first carrier in the chain.



The goods are delivered loaded in the first carrier who has been hired by the seller. Therefore, all costs and risks of unloading the goods at destination are borne by the buyer.

However, it is common that the carrier hired by the seller to transport the goods to destination will be interested to have their means of transport (trucks, ships, aircraft) free as soon as possible so that the discharge is usually included in the port (terminal discharge) paid by the seller. That is, the unloading at destination, except in the case of sea transport is usually paid by the seller, though according to Incoterms rules shall be borne by the buyer. In the event that, according to the contract of carriage, unloading costs are borne by the seller, the buyer may not claim a refund, unless both parties agree.

Delivery document

The seller must give the buyer the usual transport document for the type of transport to be hired like carriage of goods by road CMR (land transport), bill of lading B/L (sea transport), airway bill AWB (air transport), railway bill of lading CIM (train transport) or FIATA bill of lading FBL (multimodal transport). These documents are usually “nominal”, i.e. the goods are consigned to a person’s name or company.

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In the case of the bill of lading B/L also can be “to the order”, so that the holder of the original documents can transmit the possession of the goods to another person or company by endorsement.

The transport document used to justify the delivery of goods must meet the follow-ing requirements:

• Include the contract goods.

• Be dated within the period that has been established for loading or shipping.

• Allow the buyer claiming delivery of goods to the carrier at destination.

• Where agreed between the parties or if it was normal business practice, the trans-port document must allow the buyer to sell the goods to another buyer during the transport, from the place of delivery to destination. To this end, in the case of a negotiable document, such as a bill of lading B/L the seller must provide the buyer with a full set of originals so he can make the sale.



Furthermore, the seller must provide the buyer with any information and help in obtaining any documents necessary to complete the formalities for import into the country of destination; and those documents relating to security in the transport of the goods from the delivery place to the final destination. The buyer must pay the seller for expenses made to obtain such information and documents.

Transport documents (carriage of goods by road CMR, bill of lading B/L, air waybill AWB, railway bill of lading CIM and FIATA bill of lading FBL) shall be obtained by the seller.


Transport contract

It is the seller who must arrange transportation from the place of delivery to the place of destination. When the seller hires transportation will choose a common transport route between the two places (delivery and destination) and a means of transportation (truck, aircraft, ship) that is appropriate for the type of goods being transported.

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Transfer of risk in transport

The risk in transporting the goods is transferred once the goods have been delivered to the carrier that transport them to destination in buyer´s country. If several carriers are involved in transporting the goods, the risk is transferred when the goods are de-livered to the first carrier in the chain. Therefore, the buyer bears all risks of transport, including the risks that may occur during international transport from the place of delivery to the place of destination.


Insurance contract

Neither party has the obligation to hire transport insurance.

If the buyer wants to cover the goods with insurance for the international transport he must hire the insurance or use Incoterm CIP which is equivalent to CPT but with transport insurance hired by the seller, though in the case of damage the beneficiary of the insurance is the buyer.










• Inland transportation (pre-carriage) to transport center, port, airport in seller´s country.

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Methods of payment

CPT can be used with any method of payment. However, if the goods have high value (e.g. machinery) the documentary methods (letter of credit or documentary credit) will require insurance to cover the international transport and in this case Incoterm CIP should be used instead of CPT.

PRACTICAL ADVICE TO USE CPT

CPT is an Incoterm lesser used than CIP, except when it comes to sales between nearby countries without no customs and the value of goods is not very high so is not considered necessary to hire insurance to cover international transport.

In these circumstances, CPT is quite favorable for the seller because it allows him to deliver the goods at a place chosen by the buyer in his own country, without the need for customs clearance of export and import. Moreover, if the goods do not have much value and the international transport implies few risks, there will be no need for a transport insurance carrier. In addition, the seller transfers the risk of transport when loading the goods on the first means of transport (usually truck) so any subsequent incidence is borne by the buyer.

Incoterm CPT is used sometimes with land transportation (truck) between neigh-boring countries without customs to deliver the goods at buyer´s premises and is the

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buyer who bears the risk of transport to destination. In this cases the cost of transport in the country of destination (on carriage) is assumed by the seller.

For the buyer, Incoterm CPT is not too favorable from the standpoint of risk in trans-port. Most of the times the buyer will prefer to use other Incoterms as CIP, DAP or FCA; in CIP the goods are covered by transport insurance paid by the seller; in DAP the risk of transport is transfer in the destination country; and in FCA, although the buyer has to bear the risk of transport and the goods are delivered in its own country origin, it is the buyer who makes the decisions regarding the hiring of transport insur-ance and, therefore, carries out a better control of the risks.

CPT is useful for the following types of international operations:

• When the seller wants to place the goods at the buyer’s country, but without as-suming the risk and the cost of transport insurance.

• In operations between neighboring countries, with no customs so it is not neces-sary clear goods for export and import, and the goods are to be delivered at the buyer’s premises but without the seller assuming the risk of transport.

• For exports between developed countries where the risk of transport is limited and is not considered essential to hire a transport insurance.

• In operations that due to the low value of the goods is not necessary to hire a transport insurance.

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KEYS TO CPT

Mode of transportAny type of transport (land, air, sea), including multimodal


Delivery placeDifferent delivery places in buyer’s country (transport centers,

airports, ports, etc.).


goodsLoaded in the international transport hired by the seller.

Delivery document Transport document (CMR, B/L, AWB).


Contract of main transport Seller.




risks.

Transfer of risks in transportWhen the goods are delivered to the first carrier hired by the

seller.





Methods of payment



documentary credit), except for high value goods that should

be insured.

63 OBLIGATIONS OF THE SELLER AND THE BUYEREX

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HOW TO USE CFR

In Incoterm CFR the seller delivers the goods on board of a ship in the port of ship-ment, but he also manages and pays the cost of freight to the port of destination. Therefore, the point where the risk of transport is transmitted (port of shipment) is different from the point to which the seller bears the costs of transport (port of destination). The terminal costs and export clearance in the port of shipment are borne by the seller.

The only difference between Incoterms CFR and CIF is that in CFR the seller is not obliged to hire an insurance transport from the port of shipment to the port of destination.

CFR is a sea transport Incoterm used mainly for general cargo and large volumes of goods. When the goods are transported in containers and the place of delivery is the port of destination, Incoterms 2010 rules advised to use CPT instead of CFR, because the containers are usually delivered at the terminals of the ports, that is, before being placed on board of the ships.

CFRCost and Freight (named port of destination)

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CFR MAIN CHARACTERISTICS

Mode of transport

This Incoterm can only be used with sea or inland waterways (rivers, canals, lakes) transport. When the goods are transported in containers and the place of delivery is the port of destination, Incoterms 2010 rules advised to use CPT instead of CFR, because the containers are delivered regularly in the port’s container terminal and not loaded on board the ship.


The seller must deliver the goods on board of the ship or procuring the goods so delivered in the shipping port of his choice. This last phrase “procuring the goods so delivered” refers to the merchandise can also be delivered after its first delivery to the buyer on board the ship, for example during transport of goods at sea, so that the first buyer can sell the goods to another buyer using the documents of the operation that has already begun. This type of sale is used in international trade of certain products like raw materials, commodities, fuel, etc.

The seller is responsible for choosing the port of shipment and the ship that will trans-port the goods to the designated port on the destination country. If the buyer was interested in a certain port to ship the goods must be specified in the sale contract.

The delivery should be made on the date or deadline. If the parties agree, the buyer is entitled to determine a date or deadline for the shipment of goods as well as a specific point to receive the goods at the port of destination.

The buyer is obliged to collect the goods from the carrier hired by the seller at the port of destination, provided that the seller has duly notified him in a timely manner.


The goods are delivered on board the ship and ready for unloading. Therefore, all costs and risks of unloading the goods at the port of destination are borne by the buyer, unless the contract of carriage states that this costs are borne by the seller. In that case, the seller cannot claim a refund to the buyer, unless both parties agree.

Delivery document

The document that justifies the obligation to deliver is the bill of lading B/L marked with the mention “freight prepaid”, which means that the selling price of the goods includes the cost of freight.


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The transport document that justifies the delivery must meet the following require-ments:


• Be dated within the period that has been established for shipment.

• Allow the buyer claiming delivery of goods to the carrier at the port of destina-tion.

• Allow the buyer, unless otherwise agreed, to sell the goods to another buyer dur-ing the sea voyage from the port of shipping to the port of destination. In this case, as the bill of lading B/L is a negotiable document the seller must provided the buyer with a full set of originals so he could make the sale.


The seller is obliged to provide the buyer with the commercial documents accom-panying the goods (commercial invoice and packing list). He also has to get all the documents required for export clearance (export SAD, certificates, licenses and authorizations, etc.). The document of sea transport (bill of lading B/L) shall be obtained by the seller.

Furthermore, the seller must provide the buyer with any information and help in obtaining any documents necessary to complete the formalities for import into the country of destination, and those documents relating to security in the transport of the goods from the delivery place to the final destination. The buyer must pay the seller for expenses made to obtain such information and documents.


Transport contract

It is the seller who must arrange transportation from the shipping port to destination port. When the seller hires transportation will choose a common transport route between the two ports and a type of ship that is appropriate for the kind of goods being transported.


The risk in transporting the goods is transferred after the goods have been delivered on board the ship at the port of shipment chosen by the seller. From that moment the buyer bears all risks of transport, including the risks that may occur during sea transport until the arrival of the goods at the port of destination.


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To transfer the risk, it is necessary that the goods transported can be identified and indi-vidualized as the goods object of the sale contract. Also, the seller must notify the buyer in a reliable way that he has put the goods at his disposal in the port of destination.

Insurance contract

Neither party has the obligation to hire transport insurance.

If the buyer wants to cover the goods with insurance for the international transport he must hire the insurance or use Incoterm CIF which is equivalent to CFR but with transport insurance hired by the seller though in the case of damage the beneficiary of the insurance is the buyer.


The costs of any mandatory inspection of the goods prior to shipment are paid by the buyer, except when such inspection is required by regulations or institutions in the country of the seller; in this case the cost are borne by the seller.








• Inland transportation (pre-carriage) to shipment port in seller s country.



• Sea transport to the port of destination.




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• Inland transportation (on-carriage) from the port of destination to the buyer s premises.

• Unloading of goods on buyer s premises.

Methods of payment

CFR can be used with any method of payment. However, if the goods have some value, usually the letter of credit will required to have insurance to cover transport and in this case should be used Incoterm CIF that is the equivalent of CFR, but with insurance purchased by the seller in favor of the buyer.

When CFR is used in letters of credit, the bill of lading B/L, besides being the con-tract of carriage, also serves to transfer possession of the goods. In that cases, the seller can enter in the bill of lading the clause “to order”, thereby maintaining possession of the goods until payment is made.

PRACTICAL ADVICE TO USE CFR

There are former names of this Incoterm such as C&F or C+F that are still used though are not correct. According to Incoterms 2010 rules the term used should only CFR.

This Incoterm is used exclusively with sea transport and has essential differences with other sea Incoterms like FOB and CIF:

• In relation to FOB: in CFR the seller assumes the cost of shipping while in FOB is assumed by the buyer.

• In relation to CIF: in CFR the seller is not obligated to hire insurance transport while in CIF the seller must hire an insurance whose beneficiary in case of dam-age is the buyer.

Moreover, in this three terms (FOB, CFR and CIF) the risk in transporting the goods is transferred from seller to buyer in the same place, i.e. once the goods have been placed on board the ship at the shipping port in the selling country.

For the transport of goods in containers is not advisable to use CFR as containers are not delivered loaded on board a ship but in the container terminals in ports. Nor is suitable to use CFR for bulk or commodities since there are other Incoterms such


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as FAS more suited to the characteristics of such goods. In the case of high value goods (e.g. machinery) would be preferable to use a Incoterm requiring the hiring of insurance transport such as CIF.

For the buyer, CFR has the disadvantage of not intervening in the choice of carrier or the ship that will carry the load, and in this sense, must be very aware of the contract of transport.

It is advisable to use CFR:

• For sea transport in which the seller wants to place the goods in a port in the buyer s country, but without assuming the risk of transportation or the cost of hiring a insurance transport.

• In general cargo or large volumes of goods that travel by ship but not in contain-ers because in that case the Incoterm that should be used is CPT.

• For sea transport operations where there is the possibility of selling the goods in transit to the port of destination, while such goods are not insured because in that case the Incoterm to be used is CIF.


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KEYS TO CFR




seller.


goodsOn board the ship chosen by the seller.

Delivery document Bill of lading B/L with the mention “freight prepaid”.

Type of cargo Mainly general cargo and complete cargo.





risks.

Transfer of risks in transportOnce the goods have been placed on board of the ship in the

port of shipment.





Methods of payment



documentary credit), except for high value goods that should

be insured.

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HOW TO USE CIP

In the Incoterm CIP, the seller delivers the goods in their own country when loading them in the first carrier hire by himself, but he pays for costs of international transport to bring the goods to their destination in the buyer s country.

The buyer assumes all the risks once the goods have been delivered to the carrier in the country of the seller. If subsequent carriers are used to bring the goods to the place of destination, the risks are transferred from seller to buyer when the goods have been delivered to the first carrier.

Under Incoterm CIP the seller must hire insurance to cover the risk borne by the buyer for loss or damage of goods during international transport. Consequently, the seller contracts for insurance and pays the premium, although the beneficiary of the insurance is the buyer. However, the buyer has to take into account that Incoterm CIP requires the seller only an insurance with minimum coverage (Clause C of the Institute Cargo Clauses). If the buyer wants a larger coverage, he needs to agree with the seller to hire additional insurance.

In this Incoterm, the seller has to complete the formalities and bear the costs of cus-toms clearance for export, not the import clearance that corresponds to the buyer.

Costs

Risks

Documents

CIPCarriage Insurence and Paid to (named place of destination)

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CIP MAIN CHARACTERISTICS

Mode of transport

CIP can be used with any mode of transport (land, sea, air) and especially with multimodal transport (containers).


The seller fulfills the obligation to deliver when he makes the goods available to the carrier that he has hired in the place he has chosen, usually in his own country. If seller and buyer did not agree on a specific place of delivery, the seller may choose the one that best suits them. The delivery should be made on the date or deadline.

If there were several successive carriers transporting goods to the destination, it is understood that the obligation to deliver is fulfilled when the goods have been de-livered to the first carrier in the chain.



The goods are delivered loaded in the first carrier who has been hired by the seller. Therefore, all costs and risks of unloading the goods at the destination are borne by the buyer.

However, it is common that the carrier hired by the seller to transport the goods to destination will be interested to have their means of transport (trucks, ships, aircrafts) free as soon as possible so that the discharge is usually included in the port (terminal discharge) paid by the seller. That is, the unloading at destination, except in the case of sea transport is usually paid by the seller, though according to Incoterms rules shall be borne by the buyer. In the event that, according to the contract of carriage, unloading costs are borne by the seller, the buyer may not claim a refund, unless both parties agree.

Delivery document

The delivery is justified by two documents:

• Transport document: depending on the type of transport can be carriage of goods by road CMR (land transport), bill of lading B/L (sea transport), airway bill AWB (air transport), railway bill of lading CIM (train transport) or FIATA bill of lading FBL (multimodal transport).

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• Document of transport insurance: insurance policy or insurance certificate.

The transport document used to justify the delivery of goods must meet the follow-ing requirements:


• Be dated within the period that has been established for loading or shipping.

• Allow the buyer claiming delivery of goods to the carrier at destination.

• Where agreed between the parties or if it was normal business practice, the trans-port document must allow the buyer to sell the goods to another buyer during the transport from the place of delivery to destination. To this end, in the case of a negotiable document, such as a bill of lading B/L, the seller must provide the buyer with a full set of originals so he can make the sale.


The seller is obliged to provide the buyer with the commercial documents accom-panying the goods (commercial invoice and packing list). He also has to get all the documents required for export clearance (export SAD, certificates, licenses and authorizations, etc.).

The seller must provide the buyer with a copy of the transportation insurance policy or certificate of insurance to have proof that insurance has been hired according to agreed conditions.




Transport contract

It is the seller who must arrange transportation from the place of delivery to the place of destination. When the seller hires transportation will choose a common transport

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route between the two places (delivery and destination) and a means of transportation (truck, aircraft, ship) that is appropriate for the type of goods being transported.


The risk in transporting the goods is transferred after the goods have been delivered to the carrier that transport them to destination in buyer s country. If several car-riers are involved in transporting the goods, the risk is transferred when the goods are delivered to the first carrier in the chain. Therefore, the buyer bears all risks of transport, including the risks that may occur during international transport from the place of delivery to the place of destination.


Insurance contract

In Incoterm CIP, the seller has an obligation to the buyer to hire an insurance policy covering transport, at least, transport from the place of delivery to the place of des-tination. However the seller is only required to purchase a policy with minimum coverage, which is known as a “C” Clause in the classification of policies of the Institute Cargo Clauses (IUA/LMA). If the buyer wants additional coverage should agree specifically with the seller or hire his own insurance policy.

The insurance of transport made by the seller must fulfill the following require-ments:

• Cover at least the transport of goods from the place of delivery to the place of destination.

• Cover at least the sales contract price plus 10%, i.e. the sum insured must be 110% of the contract price.

• Cover at least the risks specified in Clause C of the Institute Cargo Clauses (IUA/ LMA) or other similar terms.

• Contract with an insurance company that has a good reputation.

• Contract in the same currency of the contract of sale.

• Grant the insurance beneficiary (the buyer) –or other company or physical person having insurable interest in the goods– the right to claim directly to the insurer in case of disaster.

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If the buyer’s request it, the seller must hire, on the account and risk of the buyer, an transport insurance policy that provides coverage beyond those set out in the compul-sory insurance contract. These coverage can be provided by Clause A or B, or others like the War Clause or the Strike Clause, all issued by the Institute Cargo Clauses (IUA/LMA).










• Inland transportation (pre-carriage) to transport center, port, airport in seller s country.


• Terminal costs (warehousing, handling, loading) in transport center, port, airport in seller s country.

• Main transport to the delivery place in the country of destination.

• Insurance transport (minimum coverage) from the place of delivery to the place of destination.


• Terminal costs (warehousing, handling, loading) in transport center, port, airport in seller s country.

• Terminal costs (unloading, handling, warehousing) in transport center, port or

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airport in buyer s country.


• Inland transportation (on-carriage) from the transport center, port, airport, to the buyer s premises.


Methods of payment

CIP can be used with any method of payment. It is useful for the documentary methods (letter of credit and documentary credit) as it is the seller who hires trans-portation and therefore have the corresponding transport document (CMR, B/L, AWB or FBL) that can provide the buyer with the rest of documentation to meet the payment terms of credit. Moreover, the transport contract made by the seller is to the place of destination specify on the Incoterm, which is the same place mentioned in the issue of the letter of credit.

PRACTICAL ADVICE TO USE CIP

Incoterm CIP is increasingly used as the trend nowadays is that the seller offers a higher level of service to the buyer and place the goods in the country of destination. On the other hand, is very versatile and can be used with any means of transport and type of cargo (general, complete or groupage).

The only difference between CPT and CIP is that in CIP the seller is required to hire and pay for insurance transport of goods to the destination, although the beneficiary of insurance and the one that must claim compensation from the insurance company in case of disaster is the buyer. Therefore, before closing a transaction with Incoterm CIP the buyer must require the seller to hire an insurance with a well known insur-ance company and payable in the buyer’s country.

According to Incoterms 2010 for CIP Incoterm the seller has the obligation to hire minimum insurance coverage; this coverage corresponds to Clause C of the Institute Cargo Clauses of London (IUA/LMA). However, if the goods are of some value –indeed for all manufactured goods–, the buyer should be required to hire the maximum coverage (Clause A). Normally, the buyer may require these conditions if a letter of credit is used as payment. If seller and buyer do not reach an agreement as to the insurance, the buyer always has the option of hiring their own additional insurance.

One advantage for the seller of using CIP is that once he has placed the goods at the buyer’s country he does not to clear them for import; that is important because

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in some countries customs is very complex. However, using this Incoterm facilitates customs clearance in the country of destination as the CIF value for sea transport (or its equivalent for different means of transport) is used in most customs to apply import taxes.

For the buyer, Incoterm CIP is also a very favorable because it allows him to receive the goods at home and covered with an insurance transport, though the risk of in-ternational transport is assumed by him.

On the other hand, when the buyer uses Incoterm CIP and payment is made at the same moment of the delivery of the goods, the buyer must ensure that the seller can-not instruct the carrier to change the destination of the goods. For this, the transport documents (CMR, B/L, AWB) provide the buyer with a duplicate original that it is used to prevent the seller from giving new instructions to the carrier. In the case of bill of lading B/L does not usually have this preventive function, but allows for a “disposal clause” which prevents the seller to order the carrier to deliver the goods to a third party in a different place that stipulated.

It is advisable to use CIP:

• When the seller wants to offer a good level of service to the buyer by placing the goods in the country of destination and covered with insurance transport.

• In land transport operations (truck) between nearby countries in which there are no customs and therefore is not necessary to clear goods for export and import. In this case, using CIP the seller can deliver the goods at buyer’s premises (fac-tory or warehouse). DAP would be equivalent with the difference that in this Incoterm the risk of transport is borne by the seller.

• In air transport operations of some value and where there is a risk that justifies the use of letter of credit as payment method. The seller delivers the goods docu-mentation (including the airway bill) against payment of the credit.

• In multimodal transport operations in which the goods travel in containers with a single transport document that is the multimodal bill of lading FBL. In these situations, if the destination is a port, the Incoterms 2010 advised to use CIP instead of CIF.

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KEYS TO CIP

Mode of transportAny type of transport (land, air, sea), specially multimodal


Delivery placeDifferent delivery places in buyer’s country (transport centers,

airports, ports, etc.).


goodsLoaded in the international transport hired by the seller.

Delivery documentTransport document (CMR, B/L, AWB) and insurance

document (policy or certificate).




The seller is obliged to hire insurance transport whose

beneficiary is the buyer. Only requires a minimum insurance

coverage (Clause C of the Institute Cargo Clauses).

Transfer of risks in transportWhen the goods are delivered to the first carrier hired by the

seller.





Methods of payment


works very well with documentary methods (letter of credit

or documentary credit).

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HOW TO USE CIF

CIF has historically been a widely used Incoterm because, in addition to placing the goods at the port of destination in the buyer’s country, the CIF value is used in most of the customs to apply tariffs and import taxes, so using this Incoterm facilitates to clear the goods for import.

In Incoterm CIF the seller delivers the goods on board of a ship in the port of ship-ment, but he also manages and pays the cost of freight to the port of destination. Therefore, the point where the risk of transport is transferred (port of shipment) is different from the point to which the seller bears the costs of transport (port of destination).

The costs of terminal in the port of shipment are borne by the seller. Unlike Inco-term CFR, the seller is obliged to hire insurance transport covering at least the way from the port of shipping to the port of destination. The insurance shall cover the price of the contract plus 10% (i.e., 110%). The beneficiary of this insurance and, therefore, the one that must apply to the insurer for compensation in case of disaster is the buyer.

CIF is used only for sea transport and usually for general cargo of both consumer products and industrial products of high value. If the goods travel in containers Incoterms 2010 rules recommends the use of Incoterm CIP.

Costs

Risks

Documents

CIFCost, Insurance and Freight (named port of destination)

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CIF MAIN CHARACTERISTICS

Mode of transport

This Incoterm can only be used with sea or inland waterways (rivers, canals, lakes) transport. When the goods are carried in containers and the place of delivery is the port of destination, Incoterms 2010 rules advised to use CIP instead of CIF, because the containers are delivered usually in the port’s container terminal and not loaded on board the ship.


The seller must deliver the goods on board of the ship or procuring the goods so delivered in the shipping port of his choice. This last phrase “procuring the goods so delivered” refers to the merchandise can also be delivered after its first delivery to the buyer on board the ship, for example during transport of goods at sea, so that the first buyer can sell the goods to another buyer using the documents of the operation that has already begun. This type of sale is used in international trade of certain products like raw materials, commodities, fuel, etc.

The seller is responsible for choosing the port of shipment and the ship that will transport the goods to the designated port on the destination country. If the buyer was interested in a certain port to ship the goods must be specified in the sale contract.

The delivery should be made on the date or deadline. If the parties agree, the buyer is entitled to determine a date or deadline for the shipment of goods as well as a specific point to receive the goods at the port of destination.

The buyer is obliged to collect the goods from the carrier hired by the seller at the port of destination, provided that the seller has duly notified him in a timely manner.


The goods are delivered on board the ship and ready for unloading. Therefore, all costs and risks of unloading the goods at the port of destination are borne by the buyer, unless the contract of carriage states that this costs are borne by the seller. In that case, the seller cannot claim a refund to the buyer, unless both parties agree.

Delivery document

The obligation to deliver is justify by two documents: the transport document and the insurance document. The first is the bill of lading B/L marked with the mention “freight prepaid”, which means that the selling price of the goods includes the cost

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of freight. The document of transport insurance can be the insurance policy or a insurance certificate.

The transport document that justifies the delivery must meet the following require-ments:


• Be dated within the period that has been established for shipment.

• Allow the buyer claiming delivery of goods to the carrier at the port of destina-tion.

• Allow the buyer, unless otherwise agreed, to sell the goods to another buyer dur-ing the sea voyage from the port of shipping to the port of destination. In this case, as the bill of lading B/L is a negotiable document the seller must provided the buyer with a full set of originals so he could make the sale.

Documents for export/import procedure

The seller is obliged to provide the buyer with the commercial documents accom-panying the goods (commercial invoice and packing list). He also has to get all the documents required for export clearance (export SAD, certificates, licenses and authorizations, etc.). The document of sea transport (bill of lading B/L) shall be obtained by the seller.

The seller must provide the buyer with a copy of the transportation insurance policy or certificate of insurance to have proof that insurance has been hired according to agreed conditions.



Transport contract

It is the seller who must arrange transportation from the shipping port to the desti-nation port. When the seller hires transportation will choose a common transport route between the two ports and a type of ship that is appropriate for the kind of goods being transported.

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The risk in transporting the goods is transferred after the goods have been delivered on board the ship at the port of shipment chosen by the seller. From that moment, the buyer bears all risks of transport, including the risks that may occur during sea transport until the arrival of the goods to the port of destination.

To transfer the risk, it is necessary that the goods transported can be identified and individualized as the goods object of the sale contract. Also, the seller must notify the buyer in a reliable way that he has put the goods at his disposal in the port of destination.

Insurance contract

In Incoterm CIF, the seller has an obligation to the buyer to hire an insurance policy covering transport, at least, from the port of delivery to the port of destination. However, the seller is only required to purchase a policy with minimum coverage, which is known as a “C” Clause in the classification of policies of the Institute Cargo Clauses (IUA/LMA). If the buyer wants additional coverage should agree specifically with the seller or hire his own insurance policy.

The insurance of transport made by the seller must fulfill the following require-ments:

• Cover at least the transport of goods from the place of delivery to the place of destination.

• Cover at least the sales contract price plus 10%, i.e. the sum insured must be 110% of the contract price.

• Cover at least the risks specified in Clause C of the Institute Cargo Clauses (IUA/ LMA) or other similar terms.

• Contract with an insurance company that has a good reputation.

• Contract in the same currency of the contract of sale.

• Grant the insurance beneficiary (the buyer) –or other company or physical person having insurable interest in the goods– the right to claim directly to the insurer in case of disaster.

If the buyer’s request it, the seller must hire, on the account and risk of the buyer, a transport insurance policy that provides coverage beyond those set out in the compulsory insurance contract. These coverage can be provided by Clause A or B, or others like the War Clause or the Strike Clause, all issued by the Institute Cargo Clauses (IUA/LMA).

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• Inland transportation (pre-carriage) to shipment port in seller s country.



• Sea transport to the port of destination.

• Insurance transport (minimum coverage) from the port of shipment to the port of destination.





• Inland transportation (on-carriage) from the port of destination to the buyer s premises.


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Methods of payment

CIF can be used with any method of payment. It is useful for the documentary meth-ods (letter of credit and documentary credit) as it is the seller who hires sea transport and therefore have the bill of lading B/L that can provide the buyer along with the rest of the documentation to meet the payment terms of credit. Besides, the transport contract made by the seller is to the place of destination specify on the Incoterm, which is the same place mentioned in the issue of the letter of credit.

When CIF is used in letters of credit or documentary credits, the bill of lading B/L, besides being the contract of carriage, also serves to transfer possession of the goods. In this sense, the seller can enter in the bill of lading the clause “to order”, thereby maintaining possession of the goods until payment is made.

PRACTICAL ADVICE TO USE CIF

In Incoterm CIF, the seller plays an important role in international logistics since he assumes the cost and management of sea transport to the port of destination in the buyer’s country. On the other hand, if the seller normally exports through maritime transport can benefit from lower rates or volume discounts on contracting with freight forwarders and logistics operators. These benefits can be transferred to their prices which will improve the competitiveness of their offers, or include them in his markup which will lead to increased the profitability of exports.

Moreover, although the seller does not perform the import clearance, somehow makes it easy since most of customs laws apply tariffs and import taxes on CIF values al-ready calculated in the documentation (invoice) to be provide to the buyer in order to make import procedures.

The differential aspect of Incoterm CIF in relation to other Incoterms is that, while is the seller who hires and pays the insurance, the beneficiary in case of disaster is the buyer. Therefore, before closing a transaction with Incoterm CIF the buyer must asked the seller to hire insurance with a company of good reputation and payable in the buyer’s country.

According to Incoterms 2010, when using CIP the seller has the obligation to hire minimum insurance coverage; this coverage corresponds to Clause C of the In-stitute Cargo Clauses of London (IUA/LMA). However, if the goods are of some value –indeed for all manufactured goods–, the buyer should be required to hire the maximum coverage (Clause A). Normally, the buyer may require these conditions if a letter of credit is used as method of payment. If seller and buyer do not reach an agreement as to the insurance, the buyer always has the option of hiring their own additional insurance.

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Incoterm CIF is only for sea transport, normally for general cargo products of con-sumer products and industrial products of high value (e.g. machinery).

The use of CIF is not recommended when goods are transported in containers –either in the form of FCL (Full Container Load) or LCL (Less than Container Load)– due that containers are delivered in port terminals and not loaded onto ships. For these cases the Incoterms 2010 recommends the use of CIP.

It is advisable to use CIF in the following cases:

• Exports of companies that already have experience in sea transport and, therefore, it is preferable that the hiring of such transport is performed by the seller.

• Exports in which the seller can get a price of shipping (freight) cheaper than the buyer because of their annual procurement volume or the transport route that will be used.

• Exports in which the value of goods or the buyer’s requirements make necessary to obtain insurance covering the transport of goods between the port of shipment and the port of destination.

• Exports in which the seller wishes to place the goods at a port in the buyer s country but without assuming the risk of transport and unloading at destination because in this case Incoterm DAT must be used.

• General cargo operations of large volume of goods traveling by ship but not in containers because in that case Incoterm CIP must be used.

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KEYS TO CIF




seller.


goodsOn board the ship chosen by the seller.

Delivery documentBill of lading B/L with the mention “freight prepaid” and

insurance document (policy or certificate).

Type of cargo Mainly general cargo and complete cargo.



The seller is obliged to hire insurance transport whose

beneficiary is the buyer. Only requires a minimum insurance

coverage (Clause C of the Institute Cargo Clauses).

Transfer of risks in transportOnce the goods have been placed on board of the ship in the

port of shipment.





Methods of payment


works very well with documentary methods (letter of credit

or documentary credit).

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HOW TO USE DAT

In Incoterm DAT the seller delivers the goods unloaded at a port terminal or another place of destination in the buyer s country. The terminal concept is quite broad and includes both terminals of transportation (land, air, sea) and logistics infrastructure (ports, airports, railway stations) or similar facilities as docks, warehouses and free zones.

Due to the different places of delivery that allows this Incoterm is important to clearly mention the specific point that seller and buyer have chosen for delivery so the con-tract for international transport made by the seller conforms to that choice.

When the seller carries the goods from the delivery terminal to another point in the buyer’s country such as buyer s premises (factory or warehouse) Incoterm DAT should not be used. The Incoterms suitable for that situation are DAP or DDP.

In Incoterm DAT, the seller has to complete the formalities and bear the costs of cus-toms clearance for export, not the import clearance that corresponds to the buyer.

Costs

Risks

Documents

DATDelivered At Terminal (named terminal at port or place of destination)

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DAT MAIN CHARACTERISTICS

Mode of transport

DAT can be used with any mode of transport (land, sea, air) and especially with multimodal transport (containers).


The seller must deliver the goods at the port terminal or place of destination. If the parties do not agree on a specific terminal, the seller can choose the terminal at the port or place of destination that suits him better. The delivery should be made on the date or deadline agreed.

The buyer is obliged to collect the goods from the carrier hired by the seller at the terminal of the destination port if the seller has duly notified in a timely manner.


The seller delivers the goods unloaded from the transportation that he has hired to carry the goods to the port or place of destination.

Delivery document

The seller must provide the buyer with a document that allows him to collect the goods at the destination place. Normally, this document is a delivery note of the car-rier hired for the seller that should be signed by the buyer s carrier. When delivery takes place in a port, the document used is a bill of lading B/L with the reference “discharge”, meaning the cost of unloading is included in the price.




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Transport contract

It is the seller who must arrange transportation to the terminal at the port or place of destination. That includes both the pre-carriage in the country of the seller and the international transport to the destination terminal in buyer’s country.


The risk is transferred from buyer to seller once the goods have been unloaded at the terminal in the port or place of destination. Therefore, the risks of unloading in the place of delivery are borne by the seller.


Insurance contract

Neither party has the obligation to hire transport insurance. However, it is advisable that the seller hire a transport insurance for international transport because he as-sumes the risks. In this sense, the buyer must provide the seller, upon request, with all information necessary to hire a transport insurance.






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• Terminal costs (warehousing, handling, loading) in seller s country.






• Inland transportation (on-carriage) from the transport center, port, airport, to the buyer s premises.


Methods of payment

DAT as well as the two other Incoterms in which the goods are delivered at destina-tion (DAP and DDP) must not be used with documentary methods of payment such as letter of credit. In this case a transport document should be requested, normally a carrier’s delivery note signed by the buyer s carrier, that serves as a proof of reception of goods at destination. In that sense, the seller is dependent on the effectiveness and speed of the carrier to obtain the document in order to collect the credit. Moreover, in the case of sea transport will be a delay of several weeks to complete the necessary documentation to collect the credit.

On the other hand, if the letter of credit do not request a document certifying receipt of goods at destination, the seller may collect the credit only with documents gener-ated by himself (invoice, packing list, certificate of origin, transport document, etc.), but if the goods do not arrive on time at destination, the buyer would not be required

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to pay the letter of credit and therefore a conflict would arise once the seller would have already collect the credit.

In short, if the seller wants to use a letter of credit as method of payment of exports is advisable to use Incoterms CIP or CIF in which the seller controls the transport document that serves to justify the delivery and also allows to collect the credit once the goods have been delivered to the international carrier in the country of origin.

PRACTICAL ADVICE TO USE DAT

This Incoterm was first created in the version of Incoterms 2010. It assumes the roles of Incoterms DAF (Delivered At Frontier), DES (Delivered Ex Ship) and DEQ (Delivered Ex Quay) that disappeared since they were very little used.

The reason for this new Incoterm is the great number and diversity of international logistics infrastructures that exist nowadays and can be considered a “terminal”. Therefore, when using this Incoterm is very important to specify the place where delivery is made.

Initially, although DAT can be used with any mode of transport, assuming the func-tions of DES and DEQ (both sea Incoterms), seems more appropriate to use when goods are delivered at a port in the buyer’s country.

In this Incoterm the seller has to hire freight from the port of shipment to the port of destination and must do so in a type of freight (known as “liner terms”) in which the cost of unloading the goods are included in the price of freight, because in Incoterm DAT the costs at the port of destination are paid by the seller.

There are different alternatives to use DAT, whose choice depends on the place of delivery:

• DAT dock in the port of destination: it is recommend to use this alternative for bulk cargo, heavy loads and complex loads (machinery). Delivery takes place once the goods have been placed in the dock at the port of destination. It would be the equivalent to Incoterm DEQ (Delivered Ex Quay) included in Incoterms 2000 that was eliminated in Incoterms 2010.

• DAT terminal in the port of destination: it is suitable when the seller wants to deliver containers unloaded at the port of destination. The seller assumes the risks and costs of transport to the port of destination terminal.

• DAT logistics zone in the country of destination: suitable for goods that are delivered in free zones, free warehouses or customs warehouses in order to un-dergo a transformation and benefit from a favorable tax and customs system.

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• DAT transport hub in the country of destination: suitable for goods travel-ing in groupage by road and delivered in a transportation hub in the country of destination, and afterwards carried to buyer s premises on his own account.

• DAT air cargo center in the country of destination: for goods traveling in groupage, by plane, and delivered in logistics platforms specializing in the treat-ment of air cargo.

• DAT rail terminal in the country of destination: for general cargo or complete cargo (complete wagons) that are supplied unloaded at the docks of railway ter-minals.

Regarding the other two Incoterms in which the goods are delivered at destination, such as DAP and DDP, the main differences with DAT are:

• In DAT the goods are delivered unloaded while in DAP are delivered ready for unloading.

• In DAT import clearance is done by the buyer while in DDP is done by seller.

• In DAT transportation in the country of destination (on-carriage) is assumed by the buyer, while in DAP and DDP is assumed by the seller.

It is advisable to use DAT in the following type of exports:

• Operation of heavy loads, bulk and complex goods (machinery) in which the buyer wants to place the goods at the dock of the port of destination. It would be the same use as the old Incoterm DEQ, disappeared in Incoterms 2010 version.

• Sales of complete containers delivered unloaded in the port of destination.

• Groupage operations in which the goods are delivered to terminals and logistics platforms in buyer’s country, and then carried to buyer s premises in his own account.

• Goods that are delivered on port logistics zones (free zones, free warehouses or cus-toms warehouses) in order to benefit from a favorable tax and customs system.

• Exports to countries at risk or with complex customs in which it is desirable to deliver the goods in a neighboring country that has a logistics center near the customs office of destination country so the buyer can collect the goods at that place and make import procedures in the country. It would be a similar use to the old Incoterm DAF (Delivered At Frontier) that was eliminated in Incoterms 2010 version.

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KEYS TO DAT



Delivery placeIn terminals (land, air, port) or other places like docks,

warehouses, free zones, in the country of destination.


goods

Unloaded from the means of transport hired for the seller to

carry the goods to delivery place in country of destination.

Delivery documentDelivery note of sellers´s carrier signed by buyer´s carrier or

bill of lading B/L with the mention “discharged”.



Contract of insuranceThere is no obligation on either party. However, it is advisable

that the seller hires insurance because he assumes the risks.

Transfer of risks in transportWhen the goods are unloaded from the means of transport in

the delivery place.





Methods of payment




EXW


AP

HOW TO USE DAP

In Incoterm DAP the seller delivers the goods, without unloading, at the place of destination in the buyer’s country. The transport risk is transferred from buyer to seller in the same place where the goods are delivered.

The place of delivery may be the buyer’s premises or a place nearby, other than a transport terminal, in the country of destination. If delivery occurs at a transport terminal or transport infrastructure (port, airport, etc.) in the country of destination Incoterm DAT should be used.

In this Incoterm the seller has to complete the formalities and bear the costs of cus-toms clearance of export, not the import clearance that corresponds to the buyer. In the event that the seller also clear goods for import Incoterm DDP should be used.

This is a very useful Incoterm for sales between countries of the same economic area (e.g. European Union) in which the seller wants to deliver the goods at buyer s prem-ises but is not necessary to clear goods for import as there are no customs.

Costs

Risks

Documents

DAPDelivered At Place (named place of destination)

EXW


AP

DAP MAIN CHARACTERISTICS

Mode of transport

DAP can be used with any mode of transport (land, sea, air) and especially with multimodal transport (containers).


The seller must deliver the goods at agreed place of destination, usually the buyer s premises (factory or warehouse) or a nearby place. If the parties do not agree on a specific place, the seller can choose the place that suits him better. The delivery should be made on the date or deadline agreed.

The buyer is obliged to collect the goods from the carrier hired by the seller at the place of destination if the seller has duly notified in a timely manner.


The seller delivers the goods prepared for unloading from the transportation that he has hired to carry them to the place of destination. Therefore, all costs and risks of unloading the goods in the place of destination are on the account of the buyer.

If in the contract of carriage the unloading costs are on the account of the seller, the seller may not claim a refund of those, unless both parties agree.

Delivery document

The seller must provide the buyer with a document that allows him to collect the goods at the destination place. Normally, this document is a delivery note of the carrier hired for the seller signed by the buyer (if the goods are delivered in buyer s premises) or a delivery note signed by the buyer s carrier (if the goods are delivered in another place in buyer s country).




EXW


AP

country of destination, and those documents relating to security in the transport of the goods from the delivery place to the final destination. The buyer must pay the seller for expenses made to obtain such information and documents.



Transport contract

It is the seller who must arrange transportation to the place of destination. That includes pre-carriage in the country of the seller, international transport, and on-carriage to the place of destination in buyer s country.


The risk is transferred from buyer to seller once the goods have been delivered pre-pared for unloading at the place of destination. Therefore, the risks of unloading in the place of delivery are borne by the buyer.


Insurance contract






EXW


AP












• Inland transportation (on carriage) to the place of delivery in seller s country.



• Inland transportation (on carriage), if it is hired, from to the place of delivery in buyer s country to his own premises (factory or warehouse).


Methods of payment

DAP as well as the two other Incoterms in which the goods are delivered at destina-tion (DAT and DDP) must not be used with documentary methods of payment such as letter of credit. In this case a transport document should be requested, normally a carrier’s delivery note signed by the buyer s carrier, that serves a proof of reception of goods at destination. In that sense the seller is dependent on the effectiveness and speed of the carrier to obtain the document and proceed to collect the credit. Moreover, in the case of sea transport will be a delay of several weeks to complete the documentation to collect the credit.

EXW


AP

On the other hand, if the letter of credit do not request a document certifying receipt of goods at destination, the seller may collect the credit only with documents gener-ated by himself (invoice, packing list, certificate of origin, transport document, etc.), but if the goods do not arrive on time at destination, the buyer would not be required to pay the letter of credit and therefore a conflict would arise once the seller would have already collect the credit.

In short, if the seller wants to use a letter of credit as method of payment of the export is advisable to use Incoterms CIP or CIF in which the seller controls the transport document that serves to justify the delivery and also allows to collect the credit once the goods have been delivered to the international carrier in the country of origin.

PRACTICAL ADVICE TO USE DAP

This Incoterm was first created in the version of Incoterms 2010. It assumes the func-tions of Incoterm DDU (Delivered Duty Unpaid) that disappeared.

In DAP, goods are delivered at destination country, either on buyer s premises or at any point or nearby town that has good transport links to the final destination of the goods.

As the delivery occurs at any point in the destination country, it must be taken into account that the buyer must performs customs formalities and pay import taxes in order to meet the agreed delivery terms. Therefore, when exporting to countries with “difficult” customs the seller must be confident that the buyer will make the appropriate import procedures so that there is no delay in delivery.

This Incoterm is more suitable for sales between countries that belong to the same economic area so there are no customs and therefore the buyer shall not clear goods for import. When used in countries with customs there is the possibility of delays in clearance and in that case the costs of warehousing are on the account of the seller.

Also must be considered that if the seller hires logistics services in the country of destination (transport, insurance, warehousing, freight handling, etc.) it is likely that indirect taxes (VAT) of these services cannot be deducted for tax purposes or, in any case, its recovery will be expensive and difficult.

Regarding the other two Incoterms in which the goods are delivered at destination, such as DAT and DDP, the main difference with DAP is that:

• In DAP the goods are delivered prepared for unloading in any point of destina-tion country, except a transport terminal, while in DAT the goods are delivered unloaded in a transport terminal in destination country.

EXW


AP

• In DAP import clearance is done by the buyer while in DDP is done by the seller.

It is advisable to use Incoterm DAP in the following cases:

• Sales between countries without customs, preferably full load (complete trucks or containers), in which the seller wants to deliver the goods at the buyer s premises but without clearing goods for import.

• Sales between countries without customs in which the seller wants to deliver the goods at an inland point in the country of destination other than a terminal or transport infrastructure because in that case Incoterm DAT should be used.

• Sales between countries with customs but in which the seller have experience and confidence that the buyer will make import procedures properly and thus will not delay the delivery of the goods at a point inside destination country.

• Exports of high value goods (e.g. jewelry, equipment, turnkey plants) in which it is preferable that the seller does not only hires insurance transport, but is the beneficiary of insurance so in case of damage can manage compensation, unlike what happens in Incoterm CIP where the buyer assumes the risk of international transport and, therefore, has to make the claim to the insurance company.

EXW


AP

KEYS TO DAP



Delivery place

a) At buyer´s premises (factory or warehouse) in destination

country.

b) In any other point in country of destination, except in a

transport terminal.


goods

Unloaded from the means of transport hired for the seller to

carry the goods to delivery place in country of destination.

Delivery document

a) Delivery note of sellers´s carrier signed by the buyer.

a) Delivery note of sellers´s carrier signed by the buyer´s

carrier.





Transfer of risks in transportWhen the goods are delivered prepared for unloading from

the transportation in the delivery place.





Methods of payment




EXW


DP

HOW TO USE DDP

In Incoterm DDP the seller delivers the goods, without unloading, at buyer s premises or a nearby place in the country of destination. The transport risk is transferred from buyer to seller in the same place where the goods are delivered.

DDP is somewhat the reverse of Incoterm EXW; it represents the greatest obligation for the seller because he assumes all costs and risks of the operation, including import procedures, to deliver the goods at the agreed place in the buyer’s country. The only cost do not assume by the seller is the unloading of goods at delivery place.

Any import tax and specifically VAT, are paid by the seller, unless the parties agree in the contract of sale that VAT or other taxes are paid by the buyer. In that case a variant of DDP, known as “DDP VAT unpaid”, should be used.

The only difference between Incoterms DDP and DAP is that in DDP all costs and taxes of import clearance are paid by the seller while in DAP are paid by the buyer. In the event that the seller has no capacity by himself or through his representatives for doing import clearance, Incoterm DDP should not be used.

If between the country of origin and the country of destination there is no customs (e.g. European Union) and the goods are delivered at buyer s premises, Incoterm DAP must be used instead of DDP, because will not be necessary to clear goods for import.

Costs

Risks

Documents

DDPDelivered Duty Paid (named place of destination)

EXW


DP

DDP MAIN CHARACTERISTICS

Mode of transport

DDP can be used with any mode of transport (land, sea, air) and especially with multimodal transport (containers).


The seller must deliver the goods at agreed place of destination, usually the buyer s premises (factory or warehouse) or a nearby place. If the parties do not agree on a specific place, the seller can choose the place that suits him better. The delivery should be made on the date or deadline agreed.

The buyer is obliged to collect the goods from the carrier hired by the seller at the place of destination if the seller has duly notified in a timely manner.


The seller delivers the goods prepared for unloading from the means of transport that he has hired to carry them to the place of destination. Therefore, all costs and risks of unloading the goods in the place of destination are on the account of the buyer.

If in the contract of carriage the unloading costs are on the account of the seller, the seller may not claim a refund of those, unless both parties agree.

Delivery document

The seller must provide the buyer with a document that allows him to collect the goods at the destination place. Normally, this document is a delivery note of the carrier hired for the seller signed by the buyer (if the goods are delivered in buyer s premises) or a delivery note signed by the buyer s carrier (if the goods are delivered in another place in buyer s country).




EXW


DP

country of destination; and those documents relating to security in the transport of the goods from the delivery place to the final destination. The buyer must pay the seller for expenses made to obtain such information and documents.



Transport contract

It is the seller who must arrange transportation to the place of destination. That includes pre-carriage in the country of the seller, international transport, and on-carriage to the place of destination in buyer s country.

Transfer of risk in transport

The risk is transferred from buyer to seller once the goods have delivered prepared for unloading at the place of destination. Therefore, the risks of unloading in the place of delivery are borne by the buyer.


Insurance contract



The costs of any mandatory inspection of the goods prior to shipment are paid by the buyer, even when such inspection is required by regulations or institutions in the country of the seller.


All procedures, costs and taxes of both export and import clearance are borne by the seller.

EXW


DP


The buyer only assumes the costs of unloading on buyer s premises. All other costs are borne by the seller:









• Inland transportation (on carriage) to the place of delivery in seller s country.


• Inland transportation (on carriage), from terminal, port, airport in buyer s coun-try to buyer s premises (factory or warehouse).

Methods of payment

DDP as well as the two other Incoterms in which the goods are delivered at destina-tion (DAT and DAP) must not be used with documentary methods of payment such as letter of credit. In this case a transport document should be requested, normally a carrier’s delivery note signed by the buyer s carrier, that serves as a proof of reception of goods at destination. In that sense, the seller is dependent on the effectiveness and speed of the carrier to obtain the document in order to collect the credit. Moreover, in the case of sea transport will be a delay of several weeks to complete the necessary documentation to collect the credit.

On the other hand, if the letter of credit do not request a document certifying receipt of goods at destination, the seller may collect the credit only with documents gener-ated by himself (invoice, packing list, certificate of origin, transport document, etc.), but if the goods do not arrive on time at destination, the buyer would not be required to pay the letter of credit and therefore a conflict would arise once the seller would have already collect the credit.

EXW


DP

In short, if the seller wants to use a letter of credit as method of payment of exports is advisable to use Incoterms CIP or CIF in which the seller controls the transport document that serves to justify the delivery and also allows to collect the credit once the goods have been delivered to the international carrier in the country of origin.

PRACTICAL ADVICE TO USE DDP

DDP is the last of the eleven Incoterms, and somehow the reverse of EXW: the seller pays all costs, expenses and taxes, to place the goods at the agreed point in the destination country. The only cost not assumed by the seller is the unloading of the goods at delivery place.

For the buyer, the Incoterm DDP is the most favorable alternative since it has to assume the management, nor the costs and risks of international operations. On the other hand allows the buyer to compare the offer of the foreign supplier (which includes all costs) with offerings from local providers to see which is more competitive.

In this Incoterm usually the place of delivery are the buyer’s premises (factory or warehouse) since in this way the buyer offers a complete logistics service (which is known as “door to door”). However, if the goods travel in groupage is customary that the goods be delivered to a terminal or transportation center. In this case the seller must use “DDP carrier”.

This Incoterm requires that the seller has experience in managing international logis-tics because he will have to carry out transport operations, customs and tax declara-tions in countries that sometimes can become very complex. The seller will need local support to make the proceedings in the best conditions of safety and speed.

Moreover, as the import clearance is done by the seller, any change in customs regu-lations (e.g. an increase in tariffs or the requirement of an import license) will mean a higher cost of the export operation that will be difficult to include in the price of the contract.

From the fiscal point of view, it must be taken into account that if the seller hires transportation services in the country of destination (handling of the goods at the terminal, inland transportation, insurance, etc.), it is likely that indirect taxes (e.g. VAT) of these services may not be tax deductible or his recovery will be very costly and difficult.

Besides, in DDP, import taxes and VAT are paid by the seller and that could be a significant percentage of merchandise value that will be difficult to recover. There-fore, these taxes should be included in the price or agreed with the buyer that VAT be on his account. In that case a variant of DDP, known as “DDP VAT unpaid”, should be used.

EXW


DP

The only difference between DDP and DAP is that in DDP all costs and taxes of import clearance are paid by the seller while in DAP are paid by the buyer. In this sense, when two countries have no customs (e.g. European Union) DDP should not be used because clear goods for import will not be necessary.

It is advisable to use this Incoterm is the following occasions:

• Exports of companies with extensive experience and knowledge of international trade and logistics that wish to provide a complete service to its customers.

• Sales transactions of companies that belong to the same multinational group, in which the head office assumes all costs and risks of sending the goods to their branch offices abroad.

• Exports to countries in which the seller has customs brokers or freight forwarders that can take import procedures in an speedy and safely way.

• Exports of high cost goods (e.g. jewelry, medical equipment, etc.) in which it is desirable that the seller owns the control and possession of the goods throughout the complete export process so if there is any problem the seller will take the initiative to solve it or to make claims to the carrier or the insurance company.

• Urgent shipments (e.g. spare parts) through courier companies, as these services are usually “door to door” and the seller wants to prevent the client from doing any customs proceeding or expending any money.

Despite the difficulties that may present this Incoterm, the evolution of logistics and the need to provide a complete service to customers, have made DDP an Incoterm increasingly used.

EXW


DP

KEYS TO DDP



Delivery place

a) At buyer´s premises (factory or warehouse) in destination

country.

b) In any other point in country of destination, except in a

transport terminal.


goods

Not unloaded from the means of transport hired for the seller

to carry the goods to delivery place in country of destination.

Delivery document

a) Delivery note of sellers´s carrier signed by the buyer.

a) Delivery note of sellers´s carrier signed by the buyer´s

carrier.

Type of cargo Complete cargo (complete trucks, containers) and groupage.




Transfer of risks in transportWhen the goods are delivered prepared for unloading from

the transportation in the delivery place.

Pre-shipment inspection Seller.


Import customs clearance Seller.

Methods of payment




TEN KEYS FOR THE

PROFESSIONAL USE OF

INCOTERMS

TEN KEYS FOR THE PROFESSIONAL USE OF INCOTERMS108

Ten keys for the professional use of Incoterms

Incoterms are trade rules used in many documents such as sale contracts, commercial invoices or letters of credit; so it is important that exporters and importers use them in a proper way. The main purpose of Incoterms is to clearly convey the conditions agreed between the parties in order to avoid conflicts.

Here are ten basic tips that exporters and importers should take into account when using Incoterms in international trade transactions.

Specify precisely the place of delivery

The first function of Incoterms is to define exactly the place of delivery of the goods. To do so, following the Incoterm should be included as accurately as possible the place of delivery (seller s or buyer s premises, transportation hub, port, airport, etc.), the city, province and country where goods are delivered. It is important to mention the city and country where delivery takes place as the world’s geography is vast and is not always easy to locate a city in a country.

Example of place of delivery in Incoterms

CIP Tianjin Airport, China, Incoterms 2010

A situation in which perhaps is better not to establish with precision the place of delivery is when using letters of credit as payment method and the goods are deliv-ered at a port in the country of origin. It may happen that at certain times there is a saturation for shipping the goods to a port on the destination country and finding a ship for the period stipulated in the letter of credit is difficult. In these situations it is better to mention such as place of delivery “port in the country of delivery” (e.g. “British port”) rather than a specific port (e.g. Plymouth or Southhampton) and therefore have the option of loading the goods at different ports.

Avoid using EXW

EXW really does not reflect the delivery conditions of an international operation because all costs and risks, except packaging, are borne and manage by the buyer, which sends a transport vehicle (usually truck) to collect the goods from the seller’s premises.

This lack of involvement by the seller in international logistics may cause various problems:


• Uncertainty about the final destination of the goods: the seller is not sure about who is the true recipient of the goods or the place to be delivered to the destination country. This could lead to distribution problems, if the goods are not sent to the country that was expected or if the goods are distributed through other channels. It could even be the case that the goods are not exported and compete with the goods of the seller at their own market.

• No evidence of exit of the goods from the country: when goods are sold outside the national territory the seller must have a receipt as proof of the export of the goods because the commercial invoices are issued without VAT. This proof may be the international transport document (e.g. CMR, B/L or AWB) or the SAD (Single Administrative Document), but when exporters used the Incoterm EXW they do not have any of the this documents since they do not hire international transport, nor make export clearance either.

• Incidents in the loading of the goods: in EXW load of goods in the first means of transportation (usually truck) is made by the buyer, but in practice it is the seller who load the merchandise as the truck that comes to seller s premises don not usually have lifting equipment to raise it, especially if it is a full container load. So if there is problems on the load (i.e. the goods fall and break down some boxes) the buyer would not want to pay these products because he has not made the load operation but according to the rules of EXW the responsibility is theirs.

• Difficulties using EXW with letters of credit: in EXW the seller has no trans-port document justifying the delivery of the goods at the agreed conditions, and also to meet the delivery terms will depend on the buyer sending the truck to collect the goods. Moreover, the buyer is not sure about the seller s compliance with the terms of delivery. Therefore it is uncommon to use EXW when the method of payment is the letter of credit.

In addition to all these potential problems one should also take into account that the Incoterm EXW involves the lowest level of service from seller to buyer and in this sense, exporters that make their offers on EXW conditions are less competitive compared with those that place the product in the destination country using Inco-terms in “C” or “D”.

FCA when goods are delivered in the country of origin

The Incoterm FCA is very flexible and has many advantages if the seller and buyer agree to deliver the goods at the seller’s country. Among others:

• Different places of delivery: with FCA the goods can be delivered at various points such as the seller’s premises (FCA factory or warehouse), a transportation center (FCA transport center), a port (FCA port or terminal port), an airport (FCA airport), etc.


• Different types of cargo: FCA serves for both, full load and groupage. In the first case it is usual that the goods are delivered to the Seller’s premises that is where the truck comes to pick them; in groupage, the merchandise is usually delivered in a transportation hub, port terminal or airport that is where consoli-dation is done with the goods of other carriers.

• Adaptation to the multimodal transport: FCA is a Incoterm very well suited to multimodal transport, especially when the goods travel by ship in containers. In these cases the rules Incoterms 2010 advised to use FCA instead of FOB, when the goods are delivered in the port of shipment in seller’s country.

• Documents justifying the export: in FCA the seller clear the goods for export clearance and has to obtain the necessary documents to justify for tax purposes (invoices without VAT invoices) the exit of the goods from the country.

• Compatibility with letters of credit: FCA can be used with letters of credit. The seller only has to request from the buyer a copy of the international transport document (CMR, B/L, AWB, etc.) or obtain a certificate FIATA FCR in the case of multimodal transport.

In short, the Incoterm FCA is increasingly being used and likely will replace EXW in most trade operations in which the seller does not arrange international transport and delivers the goods in their own country.

With containers use only Incoterms for any mode of transport

The rules of the Incoterms 2010 clearly specifies that when the goods travel in con-tainers should not be used sea Incoterms because containers are not delivered loaded on ships but in port terminals; in these cases in instead of using FOB, CFR or CIF should use FCA, CPT or CIP, respectively.

However, this new use of Incoterms 2010 may enter in conflict with the practice in international trade as a large part of exports in container is done through the FOB and CIF Incoterms that are the oldest and most widely used. It is therefore expected that for some time exporters, importers, carriers, freight forwarders, etc., continue to use sea Incoterms when the goods travel in containers. In these cases, it is advisable to ask the one that drafts the contract (seller or buyer) to replace the sea Incoterm with the adequate one, according to Incoterms 2010 to avoid problems of interpretation in case of conflict.


Ten keys for the professional use of Incoterms

Use sea Incoterms only for goods load overboard

In Incoterms 2010 the use of sea terms is relegated in comparison with Incoterms for any mode of transport. In fact, the classification of Incoterms 2010 presents the first obligations of sellers and buyers in the seven Incoterms for any mode of transport Incoterms and then those of the four sea Incoterms.

Incoterms for any mode of transport fit much better than sea Incoterms with the current logistics applications, especially in terms of loading and unloading in ports. In this sense, sea Incoterms should be used only for goods loaded by the ship’s rail as general cargo, bulk or large loads (e.g. heavy machinery).

Control international transport: export in “C” and import en “F”

As a rule, the most experienced companies in international trade try to control in-ternational transport. They have developed logistics expertise or use the services of forwarding agents from different geographical areas that allow them to manage international logistics, placing the goods exported to the countries of their customers and buying goods imported from the countries of their suppliers; i.e. this companies export in terms “C” and import in terms “F”.

International transport management provides several advantages to exporters and importers:


• Cost savings: if the company has a significant international trade volume, hiring transportation will give cheaper rate when negotiating with carriers, forwarders or logistics providers. These savings will mean greater profitability in their operations and also may be apply to reduce their prices to be more competitive.

• Meeting deadlines: international transport generates uncertainty in time need-ed to deliver the goods, especially in the case of intercontinental shipping. On the other hand, delivery terms are really important for companies that import raw materials or components that are used in their production processes, and also for importing consumer products resell in their local market. In these circumstances, if the imports are made in “F” (FCA or FOB) it will be easier because the seller fulfils the delivery time when he places the goods at the agreed place in his own country.

• Documents control: documents of international trade are complex and can be a barrier to ensure that goods reach their destination. If the company controls the international transport, it will be in a better position to obtain the docu-ments necessary for customs clearance. Furthermore, in the case of any incident occurring in transport will respond quickly, providing the documents needed to prevent the operation is delayed.

• Compliance with the conditions of letters of credit: in the case of exports, if the seller uses a “C” term, they will have no trouble getting the documents required in the letter of credit, in particular, the document of international transport that serves to proof the delivery of goods. In the case of imports un-der “F” terms, the buyer may request an inspection at the port of shipment as a document requirement for the letter of credit payment.

Use Incoterms in “D” only for countries of low risk

Incoterms of delivery in the country of destination (Incoterms in “D”) should only be used in low-risk countries in which the seller has the means to control logistics. The concept of risk is broad and covers political risk (war, social conflicts), commercial (customer default), logistic (deficiencies in transport infrastructure) or administrative risk (complex customs procedures). Any of these risks can jeopardize international sale when seller and buyer agree to deliver the goods in the country of destination, under “D” terms.

Incoterms in “D” (DAT and DAP) are suitable for delivery in an integrated economic area such as the EU where there are no customs. When using DDP, it should be taken into account that the seller pay the import clearance formalities on arrival and that includes payment of all taxes (tariffs, taxes, VAT) which will be difficult to recover, because normally the seller has no fiscal residence in the country where the goods are delivered.


Insurance international transport with maximum coverage

For any goods manufactured, it is advisable to hire insurance transport, especially for the international transport between the country of origin and destination. The cost of insurance is not too expensive since it represents about 0.5% of the goods value.

According to Incoterms 2010, only in terms CIF and CIP is transport insurance required: it must be the seller who hires the insurance and bear the costs while the beneficiary of insurance is the buyer, who is the one that assumes the risk.

Although not required, buyers and sellers should insure the goods depending who takes the risks in international transport. In Incoterms EXW and “F”, the interna-tional transportation risk is assumed by the buyer and therefore, he should hire the insurance. In Incoterms CPT an CFR he also assumes the risk and hires the insur-ance. In Incoterms in “D” is the seller who assumes the risk to delivery in the country of destination and should hire transport insurance.

In Incoterms CIP and CIF the seller is only obliged to obtain minimum insurance coverage (Section C of the London Institute Cargo Clauses), but it is advisable to hire for international transportation a maximum coverage that includes coverage Clause A of the Institute Cargo Clauses (ICC) plus War Clause and Strike Clause. The cost of hiring these additional coverage is not significant and is the closest to the concept of “all risk” which does not really exist as such in international transport insurance.

Maximum coverage insurance freight

Clause A of ICC + War Clause + Strike Clause

Do not use variant of Incoterms

Exporters and importers must adhere to the use of eleven Incoterms published in the 2010 version, avoiding variations that have been used in the past. In fact, in the Incoterms 2010, unlike previous versions, there is no mention to any variant.

However, due to common use of some variants, three of them should be taken into account and eventually may appear in international operations:

• EXW loaded: in this version of EXW, the costs of loading the goods in the truck –and, therefore, the risks– are on the account of the seller. Normally when using EXW is the seller who makes the load on the first carrier and, therefore, this variant corresponds more to reality than the rule EXW in which the costs and risks of the load are borne by the buyer.

• CIF maximum coverage: the seller hires insurance coverage of international


transportation with Clause A of the Institute Cargo Clauses plus a Strike Clause and a War Clause.

• DDP VAT unpaid: the seller bears the costs of import clearance but without ac-counting for VAT. Incoterms 2010 specifically referred to this possibility because of the difficulties faced by the seller to recover the VAT applied over the value of the goods at the destination country.

In any case, when using some variant of the Incoterms, it should be clearly specified in the contract of sale how cost and risks are allocated between buyer and seller ac-cording to the variant.

Reference to Incoterms 2010 version

As mentioned at the beginning of this publication, the importance of Incoterms is based on the widespread use made of them in international trade. Therefore, whenever Incoterms are used in certain documents –offers, purchase orders, sales contracts, pro forma invoices, etc.– it is worth mentioning that it refers to the latest version of Incoterms published by International Chamber of Commerce. For that, it is sufficient to include after the three acronym letters of the Incoterm and the place of delivery the expression “Incoterms 2010”.

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