Incoterms® 2010: Speaking the Same Language

Tags: Supply Chain Management, Global Logistics, Import, Export

People of different nationalities speaking in Incoterms

Incoterms 2010 rules are 11 terms of shipment and delivery used in business-to-business purchase contracts and tangible portable goods sales. The rules were developed by the International Chamber of Commerce, a Paris-based organization providing trade-related rules and services through its worldwide network of affiliates.

Since their inception in 1936, Incoterms have received worldwide acceptance. They are revised as needed to address changes in the way trade is conducted. Their life span has averaged about 10 years, so the Incoterms 2010 rules should remain in use for a while.

Each Incoterms rule assigns various cost and performance tasks that buyers and sellers agree to handle, thereby becoming contractual responsibilities that they then owe to each other. By incorporating an Incoterm and an agreed place in the purchase-sale contract, the parties reduce the possibility of misunderstanding or overlooking important tasks, and increase the likelihood of successful fulfillment. As Incoterms rules are a significant part of purchase-sales contracts, it is important that both buyers and sellers understand how to correctly use them.

Everything in its Place

All Incoterms rules must be accompanied by a geographic place. This place should be as specific as possible, because in all 11 rules, the chosen place indicates where the seller's costs end in the transaction. Costs beyond that place are for the buyer's account.

Incoterms are not law, so parties wishing to use the rules should cite them in their purchase-sales contracts. Specify the desired Incoterm, the accompanying place, and the version (presumably Incoterms 2010).

Each Incoterms rule indicates the place where the seller delivers , which is where seller risk for the condition of the contract goods ends. We commonly use "delivery" to mean arrival in everyday speech, so keep in mind that in contract law, delivery means end of seller risk. In only three of the 11 Incoterms do sellers remain at risk until the goods arrive. In the other eight, sellers deliver by merely making the goods available or handing them over to carriers.

Every Incoterms rule has a three-letter abbreviation. This will always be in English, regardless of the contract language.

Only two of the 11 rules—CIP and CIF—speak to insurance. Both require sellers to provide at least minimum cover, called Free of Particular Average (FPA) in the United States, and Institute Cargo Clauses C in most other markets.

The other nine rules do not require anyone to insure, but it is assumed that buyers will insure in their own self-interest as carrier liability can be extremely limited.

Further, as minimum cover provides very limited protection, the parties should consider additional coverage—for example, what Americans mistakenly call All Risks, and others call Institute Cargo Clauses A. Also consider adding strike, riot, civil commotion, war, and warehouse-to-warehouse coverage. Insurance provided under CIP and CIF is normally for 110 percent of the value of the goods, plus freight and insurance costs. It also must allow buyers to claim directly from the insurers.

Incoterms do not address two important issues: ownership transfer and remedies for breach of contract. The best practice is to address those issues elsewhere in the purchase-sales contract. For contracts that are silent, the answers will likely come from the applicable law, sometimes with unexpected results.

All 11 Incoterms rules require sellers to package the goods appropriately for transport. The rules do not, however, extend to carefully stowing containers. Savvy buyers who purchase in full containerload quantities stipulate adequate stowage elsewhere in the purchase-sale contract.

While Incoterms rules are designed for use in purchase-sales contracts, additional contracts are usually needed for fulfillment. For instance, some transportation is generally required. With the exception of Ex Works, each Incoterms rule directs one party or the other to contract for it. As mentioned above, CIP and CIF deal with insurance contracts.

Global Trade on the Move

Knowing how transportation is contracted is important to understanding the mechanics of how Incoterms rules work. In international trade, the seller is in one country and the buyer is in another, so international transportation can be divided into three categories:

  1. Pre-carriage: Movement of goods from the place where the shipment originates (often the seller's premises) to departure place on the seller's side. This is often called inland freight.
  2. Main carriage: Movement of goods from the departure place on the seller's side to the arrival place on the buyer's side.
  3. On-carriage: Movement of goods from the arrival place on the buyer's side to the place where transportation ends (often the buyer's premises). This is sometimes called inland freight on the buyer's side.

Using these three definitions, let's examine typical transportation contracts, called carriage contracts in Incoterms:

Door-to-door: A single contract including pre-carriage, main carriage, and on-carriage, which is all the carriage there is.

Door-to port or door-to-airport: A single contract including pre-carriage and main carriage, but not including on-carriage. Someone other than the contracting carrier—often the buyer—must handle any necessary on-carriage.

Port-to-port or airport-to-airport: A single contract for main carriage only. Someone (or often more than one party) other than the contracting carrier must handle any necessary pre-carriage and on-carriage.

Port-to-door or airport-to-door: A single contract of main carriage and on-carriage, but not including pre-carriage. Someone other than the carrier—often the seller—must handle any necessary pre-carriage.

Incoterms differentiate between marine-only and omnimodal rules. The marine-only FAS, FOB, CFR, and CIF rules pre-date air freight and containerization, going back to the time when all vessel transportation was done on a port-to-port basis. These rules work well in situations where sellers and buyers are actually involved in vessel loading and unloading—with bulk, breakbulk, and project cargo, for example.

Conversely, the FCA, CPT, CIP, DAT, DAP, and DDP rules reflect modern practices, and may be used for all modes—air, ground, vessel, and multimodal transport. The one remaining rule, Ex Works, does not require either party to handle transportation, although, in practice, the buyer usually does so.

Ex Works (EXW) represents absolute minimum seller obligation. All sellers are required to do is have the goods suitably packaged and available, and notify the buyers accordingly. Unique among Incoterms rules, EXW does not require sellers to load the collecting vehicle or handle export clearance.

The remaining 10 rules are divided into three groups: F, C, and D.

The F-GROUP

The F-Group rules task buyers with contracting for main carriage, so the accompanying place must always be on the seller's side. The F-Group rules favor buyers who have transportation expertise and competitive freight costs. An additional benefit to U.S. importers is that appointing forwarders and main carriers assures access to data required to comply with Importer Security Filing and Additional Carrier Requirements (10+2) pre-shipment importer reporting requirements.

Free Carrier (FCA): is the only omnimodal F-Group term, and comes with two possible alternatives:

  1. Accompanied by the place where shipment begins: Sellers must have the goods suitably packaged and available, notify the buyer accordingly, load the collecting vehicle, and arrange for export clearance. Delivery occurs when the vehicle is loaded. This works particularly well when buyers have arranged door-to-door transportation.
  2. Accompanied by another place on the seller's side, often a buyer-appointed carrier's terminal or forwarder's warehouse: As above, except sellers also handle pre-carriage, and delivery occurs when the delivering vehicles arrive at the accompanying place before unloading.

Free Alongside Ship (FAS): Sellers are responsible for any required packaging; placing the goods next to the buyer-appointed vessel, which is where delivery occurs; and export clearance.

Free on Board (FOB): Same as FAS, except sellers are also responsible for loading the buyer-appointed vessels, and delivery occurs once the goods have been loaded.

The C-GROUP

The C-Group rules require sellers to contract for main carriage transport, so the accompanying place must be somewhere on the buyers' side. Although sellers select the carriers and forwarders, they deliver by handing the goods over to a carrier somewhere on the sellers' side, and are not responsible for the condition of the goods during main carriage. For this reason, C-Group rules favor sellers.

While convenient for inexperienced buyers, savvy ones will accept C-Group rules only if accompanied by very attractive freight costs. (Buyers may bargain for the same freight costs on a D-Group rule basis.)

Carriage Paid To (CPT): Sellers provide the goods, appropriately packaged; contract for carriage to agreed places on the buyers' side; and handle export clearance. As this rule is omnimodal, the places may be anywhere on the buyers' side—ports, airports, buyers' premises, etc.—that the parties agree. Although sellers contract for carriage, delivery occurs when the goods are handed over to the first carrier, which usually happens at the place where the shipments originate , often the sellers' premises.

Carriage and Insurance Paid (CIP): Same as CPT, except sellers must also provide insurance.

Cost and Freight (CFR): Sellers provide the goods, appropriately packaged; contract for carriage to agreed ports on the buyers' side; and handle export clearance. CFR is used only for port-to-port transportation. Delivery occurs once the goods are vessel-loaded at the ports on the sellers' side.

Cost Insurance and Freight (CIF): Same as CFR, except sellers must also provide insurance.

THE D-GROUP

The D-Group rules resemble the C-Group in that they task sellers with contracting for transit. Delivery occurs when the goods arrive at the accompanying places, however, so sellers remain responsible for the condition of the goods during transit. Buyers find these rules attractive when their suppliers can provide lower freight costs and/or better service.

Delivered at Terminal (DAT): Sellers provide the goods, appropriately packaged; contract for carriage to, and unloading at, the agreed terminals on the buyers' side; and handle export clearance. Delivery occurs when the goods arrive and are unloaded at the agreed terminals. This rule is omnimodal, and the terminals may be anywhere on the buyers' side that the parties agree. This is the only rule that specifically requires sellers to unload anything.

Delivered at Place (DAP): Sellers provide the goods, appropriately packaged; contract for carriage to agreed places on the buyers' side ready for unloading; and handle export clearance. Delivery occurs when the goods arrive at the agreed places. As this rule is omnimodal, the places may be anywhere on the buyers' side that the parties agree—ports, airports, buyers' premises.

Delivered Duty Paid (DDP): Same as DAP, except sellers must also handle import clearance. DDP is the only Incoterms rule that requires sellers to handle import clearance. This creates the awkward situation of sellers attempting to comply with the import regulations of buyers' governments. Many sellers refuse to do business this way, or add hefty provisions to their pricing for the additional effort and risk it entails. Buyers run the risk of critical goods being delayed in customs as a result of seller error. DDP also creates difficulties for buyers seeking drawback (recovery of import duty upon re-exportation), because, by definition, they are not importers of record.

No single article about Incoterms rules can do more than merely skim the surface, so step one is reading a copy of the official Incoterms 2010. You will find it user-friendly; complete with guides, drawings, and a 10-item matching column of buyer-seller tasks for each of the 11 rules. The book is available at www.InternationalTradeBooks.org.

*Incoterms is a trademark of the International Chamber of Commerce, registered in several countries.

Frank Reynolds of International Projects Inc. is a pre-eminent Incoterms rules expert, and U.S. Delegate to the Incoterms 2000 and 2010 Revisions