Newsletter No. 055

I.  What are Trade Terms?

Every international sale of goods contract should in­clude terms which govern key trade issues such as the time, place and manner of the trans­fer of such goods. These terms are called “trade terms”. In other words, trade terms set out the responsibilities of the buyer and seller with regards to the delivery of the goods in question, e.g. method of de­livery, pay­ment of shipping costs, insur­ance and customs. Over the years, standard­ised predefined trade terms have been developed in order to reduce the nego­tiation time for such transactions. The most popular of these predefined terms are the International Commercial Terms (INCOTERMS).

II.  What are the International Com­mercial Terms (INCOTERMS)?

The INCOTERMS represent a set of pre-defined international trade terms (usually re­ferred to by their abbreviated title), first introduced by the International Chamber of Commerce (ICC) in 1936. Since 1980 they are adapted to the changing legal, commercial and technological circumstances in a decennial rhythm.

The purpose of the INCO­TERMS is to standardise the usage of trade terms in order to reduce uncertainty and avoid disputes. The most recent ver­sion of the INCOTERMS was published in 2020. However, older version can still be used if

the parties so wish. For this reason, it is always important to specifically state which version of the INCOTERMS is applicable, e.g. “INCOTERMS 2020”.

III. Applicability

INCOTERMS will only apply if two commercial parties expressly stated their application in the sale of goods contract itself or if they have been effectively included in the relevant offer/quotation, general pur­chase and sale conditions, order, order confirmation etc. The majority of the clauses are multimodal, which means they can be used for a variety of trade connections.

Besides the explicit agreement between the parties to apply the INCOTERMS, it is, as aforementioned, important to point out the particular version of the INCOTERMS which is to be applied. Due to the dif­ferences between the differing versions (e.g. INCOTERMS 2010 and 2020), a reference to just “INCOTERMS” can cause serious problems. Furthermore, it is crucial to point out the destination point. Without the latter, the INCOTERM is not useful as it is not clear where the goods shall be provided or be delivered. The destination point is to be distinguished from the place of delivery, which constitutes the place in which the risk of accidental loss skips from the seller to the buyer. The place of delivery results from the provision of the specific INCOTERMS clause.

Therefore, the INCOTERMS should be agreed on in the contract as follows:

1. Statement of the specific INCOTERM
2. Statement of the destination point
3. Reference to the particular version of the INCOTERMS

Template for a delivery clause: “delivery shall be CIF BANGKOK- Pratunam storehouse hall 5 INCOTERMS 2020”.

1. What do the INCOTERMS cover?

The INCOTERMS define the rights and obligations of the parties with re­gards to:

• Delivery and transportation docu­mentation (or equivalent electronic notifica­tions);
• Allocation of costs for freight, taxes, duties, insurance etc.; and
• Transfer of risk.

INCOTERMS do not govern:

• The transfer of ownership and other rights arising from owner­ship;
• Breaches of contract and the con­sequences thereof;
• Description or quality of goods;
• The timing and method of pay­ment;
• Choice of law; or
• Issues related to forwarders/carriers.

2. Categories of INCOTERMS

The INCOTERMS clauses can be broadly divided into four groups as fol­lows:

• The E-terms (EXW), under which the seller’s only responsibility is to make the goods available to the buyer at the seller’s premises;
• The F-terms (FCA, FAS and FOB), under which the seller must deliver the goods to a carrier who is ap­pointed by the buyer;
• The C-terms (CFR, CIF, CPT and CIP), under which the seller must ar­range the transportation of the goods but does not assume the risk of loss or damage to the goods or of any additional costs which arise due to events which occur after ship­ment/dispatch; and
• The D-terms (DAT, DAP, and DDP), under which the seller bears all costs and risks of delivering the goods to their final destination.

3. Most Frequently Used INCOTERMS

Please note that the terms FOB and CFR which are discussed below mainly apply to contracts which use maritime and inland waterway transport, however, they can also be agreed upon in case of air freight.

4. Ex Works (“EXW”)

EXW places the least obligations on the seller, as the buyer must bear all costs and risks involved in removing the goods from the seller’s premises.

a) Delivery

The seller must pack the goods using appro­priate packaging and then make the goods available at his premises for the buyer’s collection at the agreed time. If no specific location within the seller’s prem­ises has been agreed, the seller may se­lect the location which is most conven­ient for him. The risk of loss or damage to the goods passes to the buyer as soon as the seller fulfils the deliv­ery obligation, i.e. when the goods are placed at the buyer’s disposal.

b) Transport and Insurance

The seller has no obliga­tion in relation to transportation or insurance. The buyer is responsible for these mat­ters.

c) Customs formalities

The buyer must obtain any requisite ex­port and import documentation and com­plete all export and import customs formali­ties at his own expense.

5. Free On Board (“FOB”)

The seller bears all costs and risks up to the point the goods are loaded on board to the vessel.

a) Delivery

The seller’s delivery obliga­tion extends to ensuring that the goods (properly packaged) are safely placed on board the buyer’s appointed ves­sel in a manner which is customary for the port of shipment. As soon as the goods have passed over the ship’s rail, the seller’s obligation is fulfilled. Up until that point, the seller bears all risks for the goods.

b) Transport and Insurance

The vessel must be provided and con­tracted by the buyer at his own expense. Equally, the buyer must arrange and bear the cost of any insurance coverage.

c) Customs formalities

The seller must obtain any requisite ex­port documentation and complete all ex­port customs formalities at his own ex­pense. Equally, the buyer must obtain any requisite import documentation and com­plete all import customs formalities at his own expense.

Please keep in mind: As far as our experience goes, the clause FOB is often misused in terms of the containerized shipment of goods. In general, the containers are being received by the carriers at the container terminals of the port of loading, long before they have been shipped on board a named vessel. By accepting an FOB trade term in a containerised shipment, the seller has to bear extra risk for the time between the container being received by the carrier at the container terminal of the port of loading and being shipped on board of the container to the named vessel. Therefore, the ICC has explicitly indicated to use the clause FCA in such cases.[1]

6. Cost and Freight (“CFR”)

a) Delivery

The nature of delivery and the passing of the risk is the same as for FOB (see above).

b) Transport and Insurance

The seller must arrange and bear the cost of transporting the goods to the named port of destination. However, the seller is not obliged to take out an insurance policy for the goods.

c) Customs formalities

The nature of this obligation is identical as that for FOB (see above). Please note that many traders continue to use the traditional abbreviation “C&F” when they refer to the above obligations. However, any contract which says “C&F INCOTERMS” will be assumed to refer to the definition of C&F used in INCO­TERMS 1980. This definition is substan­tially different from the INCOTERMS 2010 definition of CFR. Thus, it is strongly recommended that the parties use the correct abbreviation, i.e. CFR, in order to avoid any unex­pected confusion or dis­pute.

7. Cost, Insurance and Freight (“CIF”)

a) Delivery

The nature of delivery and passing of risk for CIF is the same as that for FOB (see above).

b) Transport and Insurance

The seller is obligated to procure and bear the cost of transport and “minimum insur­ance cover of the Institute Cargo Clause” for the goods in question to the named port of destination. If the buyer requires ad­ditional insurance, he must bear the relating cost himself.

c) Customs formalities

The nature of this obligation is the same as that for CFR (see above).

8. Delivered at Place (“DAP”)

a) Delivery

With this term, the seller has the responsibility to deliver the goods to the buyer at a predetermined destination. As discussed in previous INCOTERMS, the seller must use appropriate packaging. As soon as the goods have been unloaded at the destination, the seller’s obligation is fulfilled. Up until that point, the seller bears all risks for the goods.

b) Transport and insurance

The seller carries all carriage expenses including any terminal expenses and insurances up to the defined destination.

c) Customs formalities

The seller must obtain any requisite ex­port documentation and complete all ex­port customs formalities at his own ex­pense. Equally, the buyer must obtain any requisite import documentation and com­plete all import customs formalities at his own expense.

9. Delivery Duty Paid (“DDP”)

a) Delivery

The Seller is responsible. However, the seller is not responsible for unloading the goods. This term places the maximum obligations on the seller and no risk or responsibility is transferred to the buyer until the specified goods arrive safely at the destination. The Seller carries all carriage expenses including any terminal expenses up to the defined destination

b) Transport and Insurance

The seller must arrange and bear the cost of transporting the goods to the named port of destination. In addition to that, the seller is obliged to take out an insurance

policy for the goods.

c) Customs formalities

A unique aspect of this INCOTERM is, that the seller is solely responsible for clearing the goods through customs. He must obtain all necessary export and import documents and any necessary registration for the goods.

VII. Changes in INCOTERMS 2020

In 2020, the ICC released the INCOTERMS 2020. The total number of INCOTERMS (11) kept the same. Nevertheless, the new version brings the following changes:

• DAT (Delivered at Terminal) is renamed Delivered at Place Unloaded (DPU);
• FCA (Free Carrier) now allows for Bills of Lading to be issued after loading;
• CIF (Cost, Insurance and Freight) and CIP (Carriage and Insurance Paid To) set out new standard insurance arrangements, but the level of insurance continues to be negotiable between buyer and seller.
• Where listed, cost allocation between buyer and seller is stated more precisely: one article lists all costs the seller and the buyer are responsible for.
• FCA (Free Carrier), DAP (Delivered at Place), DPU (Delivered at Place Unloaded) and DDP (Delivered Duty Paid) now take account of buyer and seller arranging their own transport rather than using a third party.
• Security-related obligations are now more prominent.
• “Explanatory Notes for Users” for each INCOTERM have replaced the 2010 edition’s Guidance Notes and are designed to be easier for users.
• CIP now requires as default insurance coverage ICC A or equivalent. It was ICC C under INCOTERM 2010. Required insurance coverage under CIF remains.

VIII. Conclusion

When negotiating an international sales con­tract, both parties need to pay close atten­tion to the trade terms. Each party must be aware of the extent of their responsibili­ties, as agreeing to certain trade terms may result in additional responsibilities and costs.

The INCOTERMS can be very helpful in that they define each party’s exact responsibili­ties and risks and thus help to speed up the process of trade negotia­tions. How­ever, INCOTERMS should be applied carefully. The parties should particularly en­sure that the exact version of INCO­TERMS used reflects their real intentions.

[1]       When using containerised shipment, we highly recommend thinking about the placement of the goods on the vessel, as this constitutes de facto two totally different loss risks of the freight. Whereas a loss of containerised freight on upper deck is not unusual due to rough sea conditions, container in the lower deck are completely safe from this kind of danger.