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INCOTERMS Update

The International Chamber of Commerce recently announced that as of 1st January 2011 the Number of INCOTERMS have been reduced from 13 to 11 terms.

International Commerce Terms (INCOTERMS) are appellations of international sales aimed at reducing the uncertainties arising from terms of trade in International Business.  INCOTERMS were developed by the International Chamber of Commerce (ICC) and have become the normative standard in International trade.  INCOTERMS have gained wide usage since their inception in 1936 and gained general acceptance by governments and legal authorities worldwide.
INCOTERMS aim to regulate and guide the obligations of parties involved in an international sale by dividing transaction costs and responsibilities between the buyer and the seller.  The terms take consideration of aspects of trade such modes of transport, terms of payment and Insurance.  The International Chamber of Commerce publishes INCOTERMS, and undertakes a constant review taking feedback from members evaluating changes in Technology to ensure the relevance of each INCOTERM.   During a recent evaluation of INCOTERMS it was decided that several INCOTERMS were no longer relevant and the Number of INCOTERMS has now reduced from 13 to 11.

INCOTERMS are divided in to 4 categories ranging from E, F, C, and D; the groups are delineated at the point completion of the transaction between buyer and seller.

Group E INCOTERMS refer to matters arising from sales at the port of departure.

Ex Works (EXW) refers to when the seller makes the goods available at the premises, and the buyer is fully responsible for all charges, placing the majority of responsibility on the buyer.  In an EXW transaction the seller must have the goods read for collection at the premises for the buyer to collect, the buyer is therefore responsible for all transportation costs and bears the risks of taking the goods to the final destination.  EXW is most often used to make initial quotation for the sale of goods.

Group F refer to goods sold with the main carriage unpaid. 

There are three INCOTERMS in this category. Free Carrier (FCA), Free Alongside Ship (FAS), and Full on Board (FOB).
Free Carrier (FCA) refers to when the seller hands over the goods after getting clearance for export to a carrier named by the buyer. This term may be used for all modes of transport but is ideally to be used for container shipment.
Free Carrier (FCA) the seller must clear the goods for export and place the goods alongside the ship (deliver to the port) this term may only be used to maritime transport and is typically reserved for heavy lift or bulky cargo.
Free on Board (FOB) refers to when the seller must themselves ensure that the goods have been loaded onboard the ship nominated by the buyer having cleared the goods for export.  Under this arrangement the cost and risks are divided at the ship’s rail.  FOB is exclusively for maritime transport.

Group C INCOTERMS are terms that guide sales made with the Main Carriage Paid.

Cost and Freight (CFR or CNF) the seller must pay the cost of sea freight to bring the goods to the port of destination.  In CFR the risk is transferred to the buyer once the goods have crossed the ship’s rail therefore insurance for the goods in not included in the cost.
Carriage Paid to (CPT) the seller must pay the cost of transportation to bring the goods to the port of destination.  In CPT the risk is transferred to the buyer once the goods have been handed over to the transporter.
Carriage Insurance Paid (CIP) is similar to CPT however the seller must also pay for the insurance.
Cost, Insurance Freight (CIF) transaction is exactly the same as CFR/CNF transaction however the seller must also pay for insurance for the goods.

Group D INCOTERMS guide sales where the seller bears most of the cost for transportation and insurance to the port of arrival.

Delivered Duty Paid (DDP) means that the seller must pay for all transportation costs including duties and bears complete risk until the goods have been delivered. This is also sometimes referred as “Free Domicile”.
Delivered at Terminal (DAT) under this rule the responsibilities relating to cost of transport and insurance of the seller end when the goods are unloaded at the named terminal.
Delivered at Place (DAP) refers to when the cost of transport insurance and the payment of duties are with the seller up to the agreed point of delivery.
The update on INCOTERMS has affected category D, reducing the consolidating Category D from 5 to 3 terms as elaborated above.

For more information please visits EPC Offices or register for our Trade Training Programmes.

 
 
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