Two weeks ago, we wrote on the implication of Incoterms in the customs valuation of imported goods. As a sequel, the following article enumerates the various international commercial terms commonly know as Incoterms and provides some pointers for understanding and using them in international sales transactions.
International Commercial Terms 2000. Introduced by the International Chamber of Commerce (ICC) in 1936, Incoterms provides an international standard for international sales and purchase contracts (cross border transactions) and sets the rules for interpreting the international trade terms. In general, the scope of the Incoterms relates to the rights and obligations of the parties to a contract of sale with respect to the delivery of goods sold excluding intangibles rights. Specifically, Incoterms defines the roles and responsibilities as to the following:
- Delivery (where and when the seller fulfills obligation to deliver/transfer of ownership);
- Documents (who provides what documents, whether manual or electronic);
- Risks (who bears the risk of loss or damage at any point of transit / Transfer of Risk); and
- Costs (who pays for what).
The 13 Incoterms. Since 1936, ICC has updated the Incoterms six times to keep up with the developments in international trade and commercial practice. The English text is the original and official version of Incoterms 2000, which has been endorsed by the United Nations Commission on International Trade Law (UNCITRAL).
Every Incoterms is referred to by a three-letter abbreviation. The latest version, Incoterms 2000, involves 13 terms as follows:
1. “E” Family (Departure Term)
EXW – Ex Works (Enamed place)
2. “F” Family (Shipment Term, Main Carriage Unpaid)
FCA – Free Carrier (Enamed place)
FAS – Free Alongside Ship (Enamed port of shipment)
FOB – Free on Board (Enamed port of shipment)
3. “C” Family (Shipment Term, Main Carriage Paid)
CFR – Cost and Freight (Enamed port of destination)
CIF – Cost, Insurance and Freight (Enamed port of destination)
CPT – Carriage Paid To (Enamed place of destination)
CIP – Carriage and Insurance Paid To (Enamed place of destination)
4. “D” Family (Delivery Term)
DAF – Delivered at Frontier (Enamed place)
DES – Delivered Ex Ship (Enamed port of destination)
DEQ – Delivered Ex Quay (Enamed port of destination)
DDU – Delivered Duty Unpaid (Enamed place of destination)
DDP – Delivered Duty Paid (Enamed place of destination)
Pointers for Using Incoterms 2000. As mentioned above, each of the Incoterms provides the rights and obligations of the buyer and the seller as to the delivery of the goods, the documents required, the transfer of risk of loss or damage, and the costs to be incurred.
Below are some pointers when using the Incoterms:
- First, buy a copy of Incoterms 2000 from ICC.
- Specify that the term applicable is Incoterms 2000 to prevent misunderstandings and possible conflicts.
- Study carefully the rights and obligations outlined in each of the Incoterms. Make sure each party agree to the rights and obligations provided in the Incoterms.
- Some of the Incoterms refer exclusively to a specific mode of transport. The terms FAS, FOB, CFR, CIF, DES and DEQ refer only to transport by sea while the rest of the Incoterms can be applied to any mode of transport.
- Although the old term C&F or CNF no longer exists, it is persistently still being misused. Use the proper term CFR instead.
- Always confirm with trading partner the specific Incoterms to be used in a particular sale transaction.
- Confirm with the other party the rights and obligations outlined under the specific Incoterms used.
- Do not try to change or add to the duties or obligations provided in the Incoterms. If there are any changes to any particular duties or obligations provided in the specific Incoterms used, this must be agreed upon and put in writing. Better still the changes should be included in the standard sales contract.
- Confirm and verify the applicable Incoterms as against the terms and conditions in the sales contract, if there is any. In case of conflict, confirm with the trading partner that the contract prevails over the Incoterms.
- Inform the bank and insurance company of the Incoterms used to notify them of the rights and obligations of the parties.
- The Incoterms used will determine the agreed price for the goods sold in terms of the costs to be incurred or paid by the buyer.
- Finally, study the Incoterms used in order to determine the dutiable value to be declared to customs at the port of destination.
An international trade and customs consultant and licensed customs broker, the author is a Fellow at WTI.PH and a Partner of DLUGMS Law Office. Please contact firstname.lastname@example.org or (632) 4050021 / 29 for your comments.