INCOTERMS

International Commerce Terms (INCOTERMS) are a series of regulations accepted worlwide for the interpretation of common commercial terms used in foreign trade.
Commercial terms are characterized by abbreviations or acronyms (for instance FOB, CIF, etc). Each Incoterm refers to a set of responsibilities between the Buyer and the Seller in international sales contracts.
Incoterms are also known as "cost clauses" because they are used for the assignment of costs and, thus, responsibilites between the Buyer and the Seller.

Incoterms accurately define responsibilities of both parties, as established according to generalized practices in international trade.
Incoterms list the responsibilities of contrating parties in a clear and simple language, more closely related to common practice than legal concepts.
Incoterms act as the ruling principle in cases of marked differences arising from existing practices. Cost adjusted in line with Incoterms define the Buyer’s minimum responsibilities. Thus, contracting parties are free to stipulate other responsibilities apart from those set by these rules.
Incoterms respect party autonomy.

How are Incoterms used?

When Incoterm provisions are applied to international sale offers or sales contracts, the following must be indicated:

Version of Incoterm clauses, for instance, "Incoterms 2000".
Name of places, for instance, "FCA SAN FRANCISCO, CÓRDOBA" - "FOB BUENOS AIRES".

Using Incoterms is not compulsory for parties in a sales contract. Likewise, parties may adapt conditions to their needs through modifications as deemed necessary. It is important not to alter the sense of commercial terms when modifications are made, as in case of litigation, ambiguous or misleading expressions will cause uncertainties for arbitrators or courts of Incoterms, parties and the dispute resolution as a whole.
A combination of circumstances is essential to the selection of the term other than mere formal content.
In this repect, the contracting parties’ experience and knowledge is of great importance. In the choice of an appropriate Incoterm, it is decisive to have knowledge of transport (routes, frequency, transfers, risks, freights, etc), ports (traditional practices, risks, requirements, etc), insurance (premiums, claims, regulatory compliance, etc), transit (charges, taxes, sevice costs, etc) and customs procedures at destination point (taxes, formalities, service costs, traditional practices) - among others.

What are the main characteristics of Incoterms?

Incoterms deal with the most important aspects of international sales. Namely,

Delivery

Conditions of delivery of goods such as place and time of delivery must be specified. In order to meet requirements, any difficult or impossible condition must be avoided. Delivery responsibility will be extinguished when the Seller meets the delivery conditions of the contract and places the goods at the Buyer's disposal. However, delivery conditions must be negotiated by the parties. The extent of buying or selling experience may lead the Buyer to import on CIF conditions and the Seller to export on FOB conditions. Delivery conditions are almost absolute and failure to comply with them in cases of Force Majeure is systematically rejected by the courts. Delivery of goods and presentation of relevant documents - although performed at different times - are closely related. The handing over of documents is the last step in complying with delivery conditions.

Risks

Risks associated with goods may occur from preparation of the sales contract to the time of delivery. Incoterm provisions remove any uncertainty upon the time when the risks are transferred from the Buyer to the Seller. Incoterms provide a solution whenever no reference to the transfer of risks is made in a contract.

Costs

Allocation of costs is specially dealt with in the interpretation of Incoterms. The Seller shall bear the costs of goods until the delivery of goods is verified according to the conditions of the contract. On certain conditions, the Seller may bear the costs of delivery . Other costs the Seller may bear are deemed additional to the delivery operation.

Documents

Incoterms establish specific provisions related to required documentation for export purposes (licences, etc) and the ensuing delivery of goods at destination point (certificate of origin, consular invoices, etc). The Seller's responsibilities may vary according to the term used. On demand, the Buyer may bear the costs and risks. Likewise, the Buyer may be helped - in any possible manner- to obtain documents required at destination point and/or during ensuing transit of goods.

Objective of Incoterms

The objective of Incoterms is to establish a common interpretation for usual terms in international sales contracts.
For the first time in 1936, the International Chamber of Commerce (ICC) published a series of rules for the interpretation of said commercial terms. These terms were subsequently modified en 1953, 1967, 1976, 1980 and 1990 according to the needs arising from the evolution of international trade. The updated version in 2000 envisaged new technologies such as the electronic data interchange (EDI), and modern modes of transport, including multimodal transport.

Incoterms are divided into 4 (four) categories:

Group E - The Seller shall be responsible for making the goods available at the Seller’s premises (factory, warehouse).

- EXW (Ex-Works) is included in this group.

Group F - The Seller shall deliver the goods to the Carrier selected by the Buyer without bearing the costs of transport. The following Incoterms are included in this group:

- FCA (Free Carrier)
- FAS (Free Alongside Ship)
- FOB (Free On Board)

Group C - The Seller shall contract the main Carrier but without responsibility for goods once these have been loaded and cleared for export.

The following incoterms are included in this group:
- CFR (Cost and Freight)
- CIF (Cost, Insurance and Freight)
- CPT (Carriage Paid To)
- CIP (Carriage and Insurance Paid To)

Group D - The Seller shall be responsible for the goods until their destination point. The following incoterms are included in this group:

- DAF (Delivered At Frontier)
- DES (Delivered Ex Ship)
- DEQ (Delivered Ex Quay)
- DDU (Delivered Duty Unpaid)
- DDP (Delivered Duty Paid)
Each incoterm establishes the costs and responsibilities between the Buyer and the Seller, and appropriate mode of transport.

The following clauses are suitable for maritime or waterway transport:
- FAS, FOB
- CFR, CIF
- DES, DEQ
For any mode of transport, including multimodal, these clauses may be used:
- EXW
- FCA
- CPT, CIP
- DAF, DDU, DDP

Conceptually, each clause reads as follows:

EWX (Ex-Works + named place of delivery).

"Ex -Works" means the Seller delivers the goods when the goods are placed at the Seller’s premises or another location agreed on (i.e. factory, warehouse etc). The Seller is not responsible for customs clearence or loading the goods on the vehicle provided by the Buyer.
Thus, this term places the minimum obligation on the Seller while the Buyer shall bear all the costs and risks in the collection of goods at the Seller's premises.
Nonetheless, if the parties agree on the Seller being responsible for the loading of the goods after delivery and bearing the risks and all costs of such loading, this must be made clear by adding explicit wording to this effect in the contract of sale. This term shall not be applied in cases where it is impossible for the Buyer to directly or indirectly comply with export formalities.
In such circumstances, FCA may be applied, if agreed by the Seller to bear the costs and risks of loading the goods.

FCA - (Free Carrier + named place of delivery)

"Free Carrier" means the Seller shall deliver the goods, cleared for export, to the carrier nominated by the Buyer at the named place. It should be noted that the chosen place of delivery has an impact on the obligations of loading and unloading the goods at that place. If delivery occurs at the Seller's premises, the Seller is responsible for loading. If delivery occurs at any other place, the Seller is not responsible for loading.
This term may be used irrespective of the mode of transport, including multimodal transport.
In a transport contract, "Carrier" means any person who agrees to transport or procure transport of goods by rail, road, air, sea or inland waterway or a combination of these modes.
If the Buyer names a person other than the Carrier to receive the goods, the Seller's obligation to deliver the goods is fulfilled when they are delivered to said person.

FAS - (Free Alongside Ship + named port of shipment)

"Free Alongside Ship" means the Seller's delivery obligations are fulfilled when the goods have been placed alongside the vessel at the named quay. This means that the Buyer shall bear all costs or risks of loss of or damage to the goods upon that time.
The FAS term requires the Buyer to clear the goods for export.
Nonetheless, if the parties agree that the Buyer shall be responsible for the clearance of the goods for export, this must be made clear by adding explicit wording to this effect in the contract of sale.
This term may only be applicable to sea or inland waterway transport.

FOB - (Free On Board + named port of shipment)

"Free On Board" means that the Seller's obligations to deliver are fulfilled when the goods have passed over the ship's rail at the named port of shipment. This means that the Buyer shall bear all costs and risks of loss of or damage to the goods upon that point. The FOB term requires the Seller to clear the goods for export. This term may only be applicable to sea or inland waterway transport. If the parties agree that the goods shall not be delivered over the ship's rail, the FCA term is more appropriate to be used.

CFR - (Cost and Freight + named port of destination)

"Cost and Freight" means that the Seller's delivery obligation is deemed fulfilled upon the time goods are passed over the ship's rail at the named port of shipment.
The Seller shall pay the costs and freight necessary to move the goods to the named port of destination, but the risk of loss of or damage to the goods, as well as any additional costs due to events occurring after delivery time, is transferred from the Seller to the Buyer.
The CFR term requires the Seller to clear the goods for export.
This term may only be applicable to sea or inland waterway transport. If the parties agree that the goods shall not be delivered over the ship's rail, the CPT term is more appropriate to be used.

CIF - (Cost, Insurance and Freight + named port of destination)

"Cost, Insurance and Freight" means that the Seller's delivery obligation is deemed fulfilled upon the time goods are passed over the ship's rail at the named port of shipment.
The Seller shall pay the costs and freight necessary to move the goods to the named port of destination, but the risk of loss of or damage to the goods, as well as any additional costs due to events occurring after delivery time, is transferred from the Seller to the Buyer. However, under CIF the Seller shall procure marine insurance against the Buyer's risk of loss of or damage to the goods during carriage.
Consequently, the Seller shall contract for insurance and pay the insurance premium. The Buyer should note that under the CIF term, the Seller is only required to obatin insurance on minimum cover. The Buyer may have more insurance cover only if specifically agreed on with the Seller, or the Buyer may procure additional insurance at the Buyer's own expense.
The CIF term requires the Seller to clear the goods for export.
This term may only be applicable to sea or inland waterway transport. If the parties agree that the goods shall be delivered over the ship's rail, the CIP term is applicable.

CPT - (Carriage Paid To + named place of destination)

"Carriage Paid To" means that the Seller shall deliver the goods to the Carrier named by the Seller, but, in addition, the Seller shall pay the costs of transport necessary to move the goods to the named destination. This means that the Buyer shall bear all the risks and any additional costs ocurring after the time the goods have been delivered.
In a transport contract, "Carrier" means any person who agrees to transport or procure transport of goods by rail, road, air, sea or inland waterway or a combination of these modes.
If subsequent Carriers are used for the transport of goods to the named destination, the risk is transferred once the goods have been delivered to the first Carrier.
The CPT term requires the Seller to clear the goods for export.
This term may be appplicable to any mode of transport, including multimodal tranport.

CIP - (Carriage and Insurance Paid to + named place of destination)

"Carriage and Insurance Paid to" means that the Seller shall deliver the goods to the named Carrier but, in addition, pay the costs of transport necessary to move the goods to the named destination. This means that the Buyer shall bear all the risks and any additional costs ocurring after the time the goods have been delivered. Nonetheless, under the CIP term the Seller shall procure insurance against the Buyer's risk of loss or damage to the goods during transport.
Consequently, the Seller shall contract for insurance and pay the insurance premium.
The Buyer should note that, under the CIP term, the Seller is only required to obtain insurance on minimum cover. The Buyer may procure more insurance cover only if specifically agreed on with the Seller, or the Buyer may procure additional insurance at the Buyer's own expense.
In a transport contract, "Carrier" means any person who agrees to transport or procure transport of goods by rail, road, air, sea or inland waterway or a combination of these modes.
If subsequent Carriers are used for the transport of goods to the named destination, the risk is transferred once the goods have been delivered to the first Carrier.
The term CIP requires the Seller to clear the goods for export.
This term may be used irrespective of the mode of transport, including multimodal transport.

DAF - (Delivered At Frontier + named place of delivery)

"Delivered at Frontier" means that the Seller's obligation is deemed fulfilled when the goods, cleared for export, have been made available at the Buyer's disposal using modes of transport with no-unloading. The goods shall not be cleared for import at the named point and place at the frontier but before the customs borders of the adjoining country The term "frontier" may be used for any frontier, including that of the country of export. Therefore, it is of vital importance that the frontier in question be defined exactly, by always naming the point and place in the term.
Nonetheless, if the parties agree that the Buyer shall be responsible for the unloading of the goods , this must be made clear by adding explicit wording to this effect in the contract of sale.
This term may be used irrespective of the mode of transport when the goods shall be delivered in a land border. When delivery shall take place at the port of destination, on board a vessel or a quay (wharf), the DES or DEQ terms are applicable.

DES - (Delivered Ex Ship + named port of destination)

"Delivered Ex Ship" means that the Seller's obligation is deemed fulfilled when the goods are placed on board the vessel, not cleared for import, at the named port of destination. The Seller shall bear the costs and risks of moving goods to the named port of destination before unloading. If the parties agree that the Seller shall bear the costs and risks of unloading the goods, then, the DEQ term is applicable.
This term may be applicable only to the delivery of goods by sea or inland waterway tranport, or by multimodal transport on board a vessel at the port of destination.

DEQ - (Delivered Ex Quay + named port of destination)

"Delivered Ex Quay" means that the Seller's obligation to deliver is deemed fulfilled when goods are placed at the Buyer's disposal, not cleared for import, at the quay (wharf) in the named port of destination. The Seller must bear the costs and risks of moving the goods to the named port of destination and unloading the goods at the quay (wharf). The DEQ term requires the Buyer to clear the goods for import and bear all the costs of duties, taxes and other charges related to importation.
If the parties agree that the Seller shall pay all or part of import charges, this must be made clear by adding explicit wording to this effect in the contract of sale.
This term may only be applicable to sea or inland waterway transport or multimodal transport when a vessel is unloaded at quay (wharf) in the port of destination. Nonetheless, if the parties agree that the Buyer shall be responsible for the costs and risks of moving the goods from the quay to another place (warehouse, terminal, transport station etc) inside or outside the port, DDU or DDP terms must be used.

DDU - (Delivered Duty Unpaid + named place of destination)

"Delivered Duty Unpaid" means that the Seller shall deliver the goods to the buyer, not cleared for import and not unloaded from any transport used, in the named country of destination. The Seller shall bear the costs and risks of moving the goods thereto but shall not be responsible for any "duty or obligation" including customs formalities, customs duties, taxes and other charges for import in the country of destination. Said "duty or obligation" shall fall on the Buyer as well as any costs and risks ocurring by failure to clear the goods for import in time.
Nonetheless, if the parties agree that the Buyer shall bear the costs and risks of customs formalities and other import charges, this must be made clear by adding explicit wording to this effect in the contract of sale.
This term may be used irrespective of the mode of transport. However, in case the goods shall be delivered on board the vessel or at the quay (wharf) at the port of destination, the DES or DEQ terms are applicable.

DDP - (Delivered Duty Paid + named place of destination)

"Delivered Duty Paid" means that the Seller shall deliver the goods - cleared for import but not unloaded from any transport used, at the named place of destination- to the buyer.
The Seller shall bear the costs and risks of moving the goods thereto and shall be responsible for any "duty or obligation" including customs formalities, customs duties, taxes and other charges for import in the country of destination.
Whereas the EXW term represents the minimum obligation for the Seller, the DDP term represents the Seller’s maximum obligation.
This term shall not be used if the Seller is unable to obtain the import license directly or indirectly.
Nonetheless, if the parties agree to exclude from the Seller's obligation some of the costs payable upon importation (such as VAT - Value Added Tax), this must be made clear by adding explicit wording to this effect in the contract of sale.
If the parties agree that the Buyer shall bear all the costs and risks for import, the DDU term is applicable.
This term may be used irrespective of the mode of transport. However, in case the goods shall be delivered on board the vessel or at the quay (wharf) at the port of destination, the DES or DEQ terms are applicable.