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FREIGHT FORWARDERS AND INCOTERMS: MAKING EXPORTING EASIER
Exporting can be a lucrative, but time consuming endeavor for the small and medium size enterprise. This article outlines ways in which exporters can mitigate confusion and delays associated with international trade logistics.
WHAT IS A FREIGHT FORWARDER?
Due to the litany of requirements of exporting, many exporters utilize a freight forwarder to act as their shipping agent. The forwarder advises and assists clients on how to move goods most efficiently from one destination to another. Perhaps the most advantageous quality of a freight forwarder is the knowledge of everything from documentation and regulations, to transportation costs and banking practices. Freight forwarders are licensed by the International Air Transportation Association for air exportation and by the Federal Maritime Commission for handling ocean bound cargo.
WHY SHOULD I USE A FREIGHT FORWARDER?
The exporter will find that the freight forwarder provides an indispensable service for a nominal rate. Whether the firm is large or small, the weight of the cargo light or heavy, the freight forwarder will take care of cargo from 'dock to door' if requested to do so. This can include correct filing of export documentation, all arrangements with carriers taken care of, packing, crating, and storage needs. So, the small and medium size exporter need not deal with the minutia of details involved with the exportation of goods from the U.S. In addition, freight forwarders typically only charge a nominal rate for their services and have access to discounted shipping rates. Given the years of experience and constant attention to detail provided by the forwarder, it's a good investment.
WHAT IS A CUSTOM'S BROKER?
A customs broker performs transactions at ports on behalf of other parties. In other words, an importer, whether into the U.S. or another country, hires a customs broker to guide their goods into a country. Like the forwarder, the broker will recommend efficient means for clearing goods through the maze of customs entry protocol. The broker can also formulate an estimate for the landed costs for shipments entering the country. U.S. exporters need not worry about booking a shipment with a foreign customs broker in most cases. Freight forwarders have arrangements or partnerships with customs brokers overseas who will clear goods that the forwarder ships to the overseas port. Conversely, those same foreign customs brokers may call upon the services of the domestic freight forwarder when the goods are headed in the opposite direction.
The transactions negotiated for the importer will include the entry of goods into a customs territory, payment of taxes and duties, and duty drawback or refunds of any kind. Further, the broker has knowledge of regulations not just from the corresponding Customs Authority, but also from a number of other regulating agencies involved in imports.
WHAT ARE INCOTERMS AND WHEN ARE THEY USED?
'Incoterms' is an abbreviation of International Commercial Terms, which were first published in 1936 by the International Chamber of Commerce (ICC). Since that time there have been six different revisions and updates to the Incoterms. The Incoterms provide a common set of rules for the most often used international terms of trade. The goal of the Incoterms is to alleviate or reduce confusion over interpretations of shipping terms, by outlining exactly who is obligated to take control of and/or insure goods at a particular point in the shipping process. Further, the terms will outline the obligations for the clearance of the goods for export or import, and requirements on the packing of items. The Incoterms are used quite frequently in international contracts, and a specific version of the Incoterms should be referenced in the text of the contract.
Although the Incoterms are widely used and exceedingly handy, they are not meant for every type of contract. Specifically, the terms used in a contract state exactly when the shipper unloads and relinquishes obligation, and when the buyer takes over for carriage and insurance. The Incoterms are not meant to replace statements in a contract of sale that outline transfers of ownership or title to goods.
Therefore, the Incoterms may not be of use when looking to resolve disputes that may arise regarding payment or ownership of goods.
Incoterms are standard trade definitions most commonly used in international sales contracts. Devised and published by the International Chamber of Commerce, they are at the heart of world trade.
Among the best known Incoterms are EXW (Ex works), FOB (Free on Board), CIF (Cost, Insurance and Freight), DDU (Delivered Duty Unpaid), and CPT (Carriage Paid To).
ICC introduced the first version of Incoterms - short for 'International Commercial Terms' - in 1936. Since then, ICC expert lawyers and trade practitioners have updated them six times to keep pace with the development of international trade.
Most contracts made after 1 January 2000 will refer to the latest edition of Incoterms, which came into force on that date. The correct reference is to 'Incoterms 2000'. Unless the parties decide otherwise, earlier versions of Incoterms - like Incoterms 1990 - are still binding if incorporated in contracts that are unfulfilled and date from before 1 January 2000.
Versions of Incoterms preceding the 2000 edition may still be incorporated into future contracts if the parties so agree. However, this is course is not recommended because the latest version is designed to bring Incoterms into line with the latest developments in commercial practice.
The English text is the original and official version of Incoterms 2000, which have been endorsed by the United Nations Commission on International Trade Law (UNCITRAL). Authorized translations into 31 languages are available from ICC national committees.
Correct use of Incoterms goes a long way to providing the legal certainty upon which mutual confidence between business partners must be based. To be sure of using them correctly, trade practitioners need to consult the full ICC texts, and to beware of the many unauthorized summaries and approximate versions that abound on the web.
ICC now publishes a brief introduction to Incoterms on a new special section of its website. The section does not provide all the answers but will help understanding of what Incoterms are for and how they are organized. We describe how to order Incoterms in the original English version and many of the world's main languages.
NEW INCOTERMS FOR 2000.
In November 1997, the International Chamber of Commerce determined that Incoterms 1990 no longer adequately reflected trade practice and needed to be revised for the millennium. Accordingly, the first meeting of the Incoterms Revision Working Group was convened in March 1998. This meeting lasted four days, and created a huge amount of recommendations, which the Incoterms Revision Drafting Group reduced to manageable proposals in two meetings during the summer. Copies were sent to the Working Group, which met again for three days to consider them in October '98. Once again, the Drafting Group at two meetings reduced their findings to proposals, and the results were sent to the ICC National Committees for additional comments in January 1999. The response was record setting, and was again reduced to proposals by the Drafting Group. These now?final proposals were put to the full ICC Commission on International Commercial Practice in June 1999.
A final draft immediately followed its approval, and the results are before you now.
As you can see, the revision process took nearly two years, and benefited from the input of hundreds of foreign trade professionals from all parts of the world. Many points were not carried unanimously, and a few barely received a majority vote.
WHAT WAS CHANGED
There were four major changes from Incoterms 1990.
1. The delivery responsibility (A4) of Free Carrier (FCA) was simplified from seven possible situations to two.
2.The export clearance responsibility (A2 ? B2) of Free Alongside Ship (FAS) was shifted from the buyer to the seller.
3. The import clearance responsibility (A2 ? B2) of Delivered Ex Quay (DEQ) was shifted from the seller to the buyer.
4. The seller's former obligation under CFR and CIF to furnish the buyer with a copy of the charter party for shipments made under bills of lading indicating same has been abolished.
There were literally over one hundred minor changes resulting in more consistent language and more detailed footnoting which will make Incoterms 2000 much easier to use. For instance, how does owner handle a situation where 'no obligation' appears in both the seller and buyer columns for the same task.
WHAT WAS NOT CHANGED
Although nearly half of the Working Group discussions focused on changing the notion of 'ship's rail' as found in FOB, CFR and CIF, and despite the fact that no one is truly satisfied with this antiquated concept, no change was made. The reason was simple, no acceptable alternative could be found. About half the group was committed to moving the risk?cost transfer further into the vessel, making the seller responsible for successful stowage.
However, that was considered to present too much risk especially in FOB with a buyer?designated vessel. The other half of the group wanted to move the cost?risk point ashore, to somewhere before the ship's rail. However, that point is already covered by FAS, or by the Omni-modal terms FCA, CPT and CEP. A third opinion is that the ship's rail (or its equivalent for liquid, bulk or gas cargoes) does serve a purpose with charter shipments which often lack the automated materials handling equipment found with liner shipments. Finally, after many hours of heated debate, and appeals to the ICC's National Committees, the decision was taken that ? warts and all ? the 'ship's rail' concept is at least well known throughout the world. Sometimes, the devil you know is better am the devil you don't.
FAS almost died. In fact, the Working Group voted it out of existence one afternoon. However, it was brought back to life by a second poll the following day, as it does have some use in charter shipping.
The proposal to kill DAF resulted in a deadlock vote at the Working Group level, and only a slim majority of National Committee votes saved it. Actually, this term has very little use, as either FCA or DDU border location will accomplish the same result
Significant time was devoted to changing the Incoterms position that minimum cover satisfies the seller's insurance obligation under CIF and CIP Obviously, this coverage is insufficient for most shipments of any value. However, no change was made for two reasons:
1. Goods are often sold while in transit under the CIF term. It was decided that subsequent buyers should be free to purchase their own coverage without being burdened by the higher cost of more adequate coverage placed by previous owners which would not benefit them.
2. Some countries require that their citizens purchase marine cargo insurance from national insurers, Since many of these third world insurance companies provide doubtful coverage, it is often prudent to buy the minimum coverage possible from them at the lowest cost and obtain more reliable coverage elsewhere.
Some other interesting proposals that didn't carry included restricting the marine?only trilogy of FOB, CFR and CIF to charter shipments and its converse, requiring the use of the omni?modal trilogy of FCA, CPT and CIP for liner shipments.
There was strong support for handling unloading and loading costs for DDU and DDP in the same manner as for the now simplified FCA. However, this was defeated, as there is far more involved in breaking down consolidated shipments with multiple shippers and/or consignees than is consolidating them.
When commercial traders enter into a contract for the purchase and sale of goods they are free to negotiate specific terms of their contract. These terms include the price, quantity, and characteristics of the goods. Every international contract will also contain what is referred to as an Incoterm (international commercial term). The Incoterm selected by the parties to the transaction will determine which party pays the cost of each segment of transport, who is responsible for loading & unloading of goods, and who bears the risk of loss at any given point during a given international shipment. Incoterms also influence Customs valuation basis of imported merchandise.
. All the current Incoterms are described below in ascending order of seller responsibility. However, Ex-works, Free on Board, Cost Insurance Freight, and Delivery Duty Paid are the most frequently used Incoterms for NextLinx’ purposes.
Group E (Departure) - Under EXW, the seller minimizes his risk by making the goods available at his factory or place of business.
The seller (exporter) makes the goods available to the buyer (importer) at the seller's premises. The buyer is responsible for all transportation costs, duties, and insurance, and accepts risk of loss of goods immediately after the goods are purchased and placed outside the factory door. The ExWorks price does not include the price of loading goods onto a truck or vessel, and no allowance is made for clearing customs. If FOB is the Customs valuation basis of the goods in the country of destination, the transportation and insurance costs from the seller's premises to the port of export must be added to the ExWorks price.
Group F (Main Carriage Not Paid By Seller)
Free Alongside Ship (FAS)
The seller transports the goods from his place of business, clears the goods for export and places them alongside the vessel at the port of export, where the risk of loss shifts to the buyer. The buyer is responsible for loading the goods onto the vessel (unless specified otherwise) and for paying all costs involved in shipping the goods to the final destination.
Free Carrier (FCA)
The seller (exporter) clears the goods for export and delivers them to the carrier and place specified by the buyer. If the place chosen is the seller’s place of business, the seller must load the goods onto the transport vehicle; otherwise, the buyer is responsible for loading the goods. Buyer assumes risk of loss from that point forward and must pay for all costs associated with transporting the goods to the final destination.
Free On Board (FOB)
The seller (exporter) is responsible for delivering the goods from his place of business and loading them onto the vessel of at the port of export as well as clearing customs in the country of export. As soon as the goods cross the “ships-rails” (the ship’s threshold) the risk of loss transfers to the buyer (importer). The buyer must pay for all transportation and insurance costs from that point, and must clear customs in the country of import. An FOB transaction will read “FOB, port of export”. For example, assuming the port of export is Boston, an FOB transaction would read “FOB Boston”. If CIF is the Customs valuation basis, international freight and insurance must be added to the FOB value.
Group C (Main Carriage Paid By Seller)
Cost and Freight (CFR)
The seller (exporter) is responsible for clearing the goods for export, delivering the goods past the ships rail at the port of shipment and paying international freight charges. The buyer assumes risk of loss once the goods cross the ship’s rail, and must purchase insurance, unload the goods, clear customs, and pay for transport to deliver the goods to their final destination. If FOB is the Customs valuation basis, the international freight costs must be deducted from the CFR price.
Cost, Insurance and Freight (CIF)
The seller (exporter) is responsible for delivering the goods onto the vessel of transport and clearing Customs in the country of export. He is also responsible for purchasing insurance, with the buyer (importer) named as the beneficiary. Risk of loss transfers to buyer as the goods cross the ship’s rail. If these goods are damaged or stolen during international transport, the buyer owns the goods and must file a claim based on insurance procured by the seller. The buyer must clear customs in the country of import and pay for all other transport and insurance in the country of import. CIF can be used as an Incoterm only when the international transport of goods is at least partially by water. If FOB is the Customs valuation basis, the international insurance and freight costs must be deducted from the CIF price. A CIF transaction will read CIF, port of destination. For example, assuming that goods are exported to the port of Los Angeles, a CIF transaction would read “CIF Los Angeles”.
Carriage Paid To (CPT)
The seller (exporter) clears the goods for export, delivers them to the carrier and is responsible for carriage costs to the named place of destination. Risk of loss transfers to buyer once the goods are transferred to the carrier and the buyer must insure the goods from that time on. If FOB is the Customs valuation basis, the international freight cost must be deducted from the CPT price.
Carriage and Insurance Paid To (CIP)
The seller transports the goods to the port of export, clears Customs, and delivers them to the carrier. From that point risk of loss shifts to the buyer. Seller is responsible for carriage and insurance costs to the named place of destination. The buyer is responsible for all costs, and bears risk of loss from that point forward. If FOB is the Customs valuation basis, international freight and insurance costs need to be deducted from the CIP price.
Group D (Arrival)
Delivered At Frontier (DAF)
The seller (exporter) is responsible for all costs involved in delivering the goods to the named point and place at the frontier. Risk of loss transfers at the frontier. The buyer must pay the costs and bear the risk of unloading the goods, clearing Customs, and transporting the goods to the final destination. If FOB is the Customs valuation basis, the international insurance and freight costs must be deducted from the DAF price.
Delivered Ex-Ship (DES)
The seller (exporter) is responsible for all costs involved in delivering the goods to a named port of destination. Upon arrival, the goods are made available to the buyer (importer) on-board the vessel. Therefore, the seller is responsible for all costs/risk of loss prior to unloading at the port of destination. The buyer (importer) must have the goods unloaded, pay duties, clear Customs and provide inland transportation & insurance to the final destination.
Delivered Ex-Quay (DEQ)
The seller (exporter) is responsible for all costs involved in transporting the goods to the wharf (quay) at the port of destination. The buyer must pay duties, clear Customs, and pay the cost/bear the risk of loss from that point forward. If FOB is the Customs valuation basis, the international insurance and freight costs, in addition to unloading costs, must be deducted from the DEQ price.
Delivered Duty Unpaid (DDU)
The seller (exporter) is responsible for all costs involved in delivering the goods to a named place of destination where the goods are placed at the disposal of the buyer. The buyer (importer) assumes risk of loss at that point and must clear Customs and pay duties and provide inland transportation & insurance to the final destination.
Delivered Duty Paid (DDP)
The seller (exporter) is responsible for all costs involved in delivering the goods to a named place of destination and for clearing Customs in the country of import. Under a DDP Incoterm, the seller provides literally door-to-door delivery, including Customs clearance in the port of export and the port of destination. Thus the seller bears the entire risk of loss until goods are delivered to the buyer’s premises. A DDP transaction will read “DDP named place of destination”. For example, assuming goods imported through Baltimore are delivered to Silver Spring, the Incoterm would read “DDP, Silver Spring”. If CIF is the Customs valuation basis, the costs of unloading the vessel, clearing Customs, and delivery to the buyer’s premises in the country of destination including inland insurance, must be deducted to arrive at the CIF value.
Illustrated Guide to Incoterms
This guide was designed to give a graphic representation of the buyer's and seller's risks and costs under each Incoterm. The material on each facing page gives a summary of seller and buyer responsibilities.
Incoterms Do . . .
Incoterms 2000 may be included in a sales contract if the parties desire the following:
1. To complete a sale of goods.
2. To indicate each contracting party's costs, risks, and obligations with regard to delivery of the goods as follows:
a. When is the delivery completed?
b. How does a party ensure that the other party has met that standard of conduct?
c. Which party must comply with requisite licenses and government-imposed formalities?
d. What are the mode and terms of carriage?
e. What are the delivery terms and what is required as proof of delivery?
f. When is the risk of loss transferred from the seller to the buyer?
g. How will transport costs be divided between the parties?
h. What notices are the parties required to give to each other regarding the transport and transfer of the goods?
3. To establish basic terms of transport and delivery in a short format.
Incoterms Do Not . . .
Incoterms 2000 are not sufficient on their own to express the full intent of the parties. They will not:
1. Apply to contracts for services.
2. Define contractual rights and obligations other than for delivery.
3. Specify details of the transfer, transport, and delivery of the goods.
4. Determine how title to the goods will be transferred.
5. Protect a party from his/her own risk of loss.
6. Cover the goods before or after delivery.
7. Define the remedies for breach of contract.
Incoterms can be quite useful, but their use has limitations. If you use them incorrectly, your contract may be ambiguous, if not impossible to perform. It is therefore important to understand the scope and purpose of Incoterms-when and why you might use them-before you rely on them to define such important terms as mode of delivery, customs clearance, passage of title, and transfer of risk.
INCOTERMS AND OTHER TRADING TERMS
Incoterms 1990 are the International Rules for the Interpretation of Trade terms as published by the International Chamber of Commerce (ICC), 1990. These have recently been upgraded to 2000 and, whilst the final analysis has not been completed for the data inn this page (it is based on Incoterms 1990), it is expectedd that any change will be minor.
They provide a set of rules for the interpretation of the most common trade terms used in international trade in order to deal with the differing interpretations and understandings that exist in various countries and trades.
When a seller and buyer wish to cite Incoterms as applying to the contract of sale, it is important to cite the term used, title and date applicable as there have been numerous amendments, eg: FOB Incoterms 2000.
Regardless of the Incoterms in use, the seller must supply the goods as agreed in the contract of sale, together with such evidence of conformity as may be required by the contract. Regardless of the Incoterms in use, the buyer must take receipt and pay for the goods delivered, as provided in the contract.
It is not recommended that the following interpretation of the terms is used commercially. This interpretation is provided as a guide only.
All INCOTERMS must be expressed by the appropriate three-letter code and include the naming of a physical place of handover and - in certain cases - the further naming of the carrier or Vessel. The buyer and seller must use the expression INCOTERMS 2000 to conclude the term, thereby clearly indicating INCOTERMS 2000 as the source of reference for definition.
These conditions are the minimum requirements for the use of these terms but the terms can be added to or modified so as to incorporate the buyer and seller's specific needs, provided that such modification does not contradict the basic INCOTERM itself.
Important Note: Certain INCOTERMS are Multimodal certain others are restricted to moves where the main carriage is by sea transport only. The terms must be used for the correct form of transport if they are to offer any protection to the parties involved.
PURPOSE OF INCOTERMS
1.The purpose of 'Incoterms' is to provide a set of international rules for the interpretation of the most commonly used trade terms in foreign trade. Thus, the uncertainties of different interpretations of such terms in different countries can be avoided or at least reduced to a considerable degree.
2.Frequently parties to a contract are unaware of the different trading practices in their respective countries. This can give rise to misunderstandings, disputes and litigation with all the waste of time and money that this entails. In order to remedy these problems the nternational Chamber of Commerce first published in 1936 a set of international rules for the interpretation of trade terms. These rules were known as 'Incoterms 1936'. Amendments and additions were later made in 1953, 1967, 1976, 1980 and presently 1990 in order to bring the rules in line with current international trade practices.
WHY NEW INCOTERMS?
3.The main reason for the 1990 revision of Incoterms was the desire to adapt terms to the increasing use of electronic data interchange (EDI). In the present 1990 version of Incoterms this is possible when the parties have to provide various documents (such as commercial invoices, documents needed for customs clearance or documents in proof of delivery of the goods as well as transport documents). Particular problems arise when the seller has to present a negotiable transport document and notably the bill of lading which is frequently used for the purposes of selling the goods while they are being carried. In these cases it is of vital importance, when using EDI messages, to ensure that the buyer has the same legal position as he would have obtained if he had received a bill of lading from the seller.
NEW TRANSPORTATION TECHNIQUES
4.A further reason for the revision stems from changed transportation techniques, particularly the unitisation of cargo in containers, multimodal transport and roll on-roll off traffic with road vehicles and railway wagons in 'short-sea' maritime transport. In Incoterms 1990 the term 'Free carriernamed place'(FCA) has now been adapted to suit all types of transport irrespective of the mode and combination of different modes. As a consequence, the terms which appear in the previous version of Incoterms dealing with some particular modes of transport (FOR/FOT and FOB Airport) have been removed.
NEW METHOD OF PRESENTING INCOTERMS
5.In connection with the revision work within the ICC Working Party, suggestions were made to present the trade terms in another manner for the purpose of easier reading and understanding. The terms have been grouped in four basically different categories; namely starting with the only term whereby the seller makes the goods available to the buyer at the seller's own premises (the 'E'-term Ex works); followed by the second group whereby the seller is called upon to deliver the goods to the carrier appointed by the buyer (the 'F'-terms FCA, FAS and FOB); continuing with the 'C'-terms where the seller has to contract for carriage, but without assuming the risk of loss of or damage to the goods or additional costs due to events occurring after shipment and dispatch (CFR, CIF, CPT and CIP); and, finally, the 'D'-terms whereby the seller has to bear all costs and risks needed to bring the goods to the country of destination (DAF, DES, DEQ, DDU, and DDP). A chart setting out this new classification is given hereafter. Further, under all terms, the respective obligations of the parties have been grouped under 10 headings where each heading on the seller's side 'mirrors' the position of the buyer with respect to the same subject matter. Thus, if for instance according to A.3. the seller has to arrange and pay for the contract of carriage we find the words 'No obligation' under the heading 'Contract of carriage' in B.3. setting forth the buyer's position. Needless to say, this dons not mean that the buyer would not in his own interest make such contracts as may be needed to bring the goods to the desired destination, but he has no 'obligation' to the seller to do so. However, with respect to the division between the parties of duties, taxes and other official charges, as well as the costs of carrying out customs formalities, the terms explain for the sake of clarity how such costs are divided between the parties although, of course, the seller might not have any interest at all in the buyer's further disposal of the goods .
CUSTOMS OF THE PORT OR OF A PARTICULAR TRADE
6.Since the trade terms must necessarily be possible to use in different trades and regions it is impossible to set forth the obligations of the parties with precision. To some extent it is therefore necessary to refer to the custom of the particular trade place or to the practices which the parties themselves may have established in their previous dealings (cf. Article 9 of the 1980 United Nations Convention on Contracts for the International Sale of Goods). It is of course desirable that sellers and buyers keep themselves duly informed of such customs of the trade when they negotiate their contract and that, whenever uncertainty arises, clarify their legal position by appropriate clauses in their contract of sale. Such special provisions in the individual contract would supersede or vary anything which is set forth as a rule of interpretation in the various Incoterms.
THE BUYER'S OPTIONS
7.In some situations, it may not be possible at the time when the contract of sale is entered into to decide precisely on the exact point or even the place where the goods should be delivered by the seller for carriage or at the final destination. For instance reference might have been made at this stage merely to a 'range' or to a rather large place, e.g. seaport, and it is then usually stipulated that the buyer can have the right or duty to name later on the more precise point within the range or the place. If the buyer has a duty to name the precise point as aforesaid his failure to do so might result in liability to bear the risks and additional costs resulting from such failure. In addition, the buyer's failure to use his right to indicate the point may give the seller the right to select the point which best suits his purpose.
8.It is normally desirable that customs clearance is arranged by the party domiciled in the country where such clearance should take place or at least by somebody acting there on his behalf. Thus, the exporter should normally clear the goods for export, while the importer should clear the goods for import. However, under some trade terms, the buyer might undertake to clear the goods for export in the seller's country (EXW, FAS) and, in other terms, the seller might undertake to clear the goods for import into the buyer's country (DEQ and DDP). Needless to say in these cases the buyer and the seller respectively must assume any risk of export and import prohibition. Also they must ascertain that a customs clearance performed by, or on behalf of, a party not domiciled in the respective country is accepted by the authorities. Particular problems arise when the seller undertakes to deliver the goods into the buyer's country in places which cannot be reached until the goods have been cleared for import but where his ability to reach that place is adversely affected by the buyer's failure to fulfil hid obligation to clear the goods for import (see further the comment to DDU below). It may well be that a buyer would wish to collect the goods at the seller's premises under the term EXW or to receive the goods alongside a ship under the trade term FAS, but would like the seller to clear the goods for export. If so, the words 'cleared for export' could be added area the respective trade term. Conversely, it may be that the seller is prepared to deliver the goods under the trade term DEQ or DDP, but without assuming wholly or partly the obligation to pay the duty or other taxes or official charges levied upon importation of the goods. If so, the words 'duty unpaid' might be added are DEQ; or the particular taxes or charges which the seller does not wish to pay may be specifically excluded, e.g. DEQ or DDP 'VAT unpaid'. It has also been observed that in many countries it is difficult for a foreign company to obtain not only the import license, but also duty relief's (VAT deduction, etc.). 'Delivered Duty Unpaid' can solve these problems by removing from the seller the obligation to clear the goods for import.
In some cases, however, the seller whose obligation of carriage extends to the buyer's premises in the country of import, wants to carry out customs formalities, without paying the duties. If so, the DDU term should be added with words to that effect such as 'DDU, cleared'. Corresponding additions may be used with other 'D' terms, e.g. 'DDP, VAT unpaid', 'DEQ, duty unpaid'.
9.In most cases, the parties would know beforehand which packaging is required for the safe carriage of the goods to the destination. However, since the seller's obligation to pack the goods may well vary according to the type and duration of the transport envisaged, it has been necessary to stipulate that the seller is obliged to pack the goods in such a manner as is required for the transport, but only to the extent that the circumstances relating to the transport are made known to him before the contract of sale is concluded (cf. Articles 35.1. and 35.2 b. of the 1980 United Nations Convention on Contracts for the International Sale of Goods) where the goods, including packaging, must be 'fit for any particular purpose expressly or impliedly made known to the seller at the time of the conclusion of the contract, except where the circumstances show that the buyer did not rely, or that it was unreasonable for him to rely, on the seller's skill and judgment').
INSPECTION OF GOODS
10. In many cases, the buyer may be well advised to arrange for inspection of the goods before or at the time they are handed over by the seller for carriage (so-called pre-shipment inspection or PSI). Unless the contract stipulates otherwise, the buyer would himself have to pay the cost for such inspection which is arranged in his own interest. However, if the inspection has been made in order to enable the seller to comply with any mandatory rules applicable to the export of the goods in his own country he would have to pay for that inspection.
FREE CARRIER NAMED PLACE (FCA)
11.As has been said, the FCA-term could be used whenever the seller should fulfill his obligation by handing over the goods to a carrier named by the buyer. It is expected that this term will also be used for maritime transport in all cases where the cargo is not handed to the ship in the traditional method over the ship's rail. Needless to say, the traditional FOB-term is inappropriate where the seller is called upon to hand over the goods to a cargo terminal before the ship arrives, since he would then have to bear the risks and costs after the time when he has no possibility to control the goods or to give instructions with respect to their custody. It should be stressed that under the 'F'-terms, the seller should hand over the goods for carriage as instructed by the buyer, since the buyer would make the contract of carriage and name the carrier. Thus, it is not necessary to spell out in the trade term precisely how the goods should be handed over by the seller to the carrier. Nevertheless, in order to make it possible for traders to use FCA as an 'overriding' 'F'-term, explanations are given with respect to the customary modalities of delivery for the different modes of transport.
In the same manner, it may well be superfluous to introduce a definition of 'carrier', since it is for the buyer to instruct the seller to whom the goods should be delivered for carriage. However, since the carrier and the document of transport are of great importance to traders, the preamble to the FCA-term contains a definition of 'carrier'. In this context, it should be noted that the term 'carrier' not only refers to an enterprise actually performing the carriage but it also includes an enterprise merely having undertaken to perform or to procure the performance of the carriage as long as such enterprise assumes liability as a carrier for the carriage. In other words, the term 'carrier' comprises performing as well as contracting carriers. Since the position in this respect of the freight forwarder varies from country to country and according to practices in the freight forwarding industry, the preamble contains a reminder that the seller must, of course follow the buyer's instructions to deliver the goods to a freight forwarder even if the freight forwarder would have refused to accept carrier liability and thus fall outside the definition of 'carrier'.
THE 'C'-TERMS (CFR,CIF,CPT AND CIP)
12. Under the 'C'-terms the seller must contract for carriage on usual terms at
his own expense. Therefore, a point up to which he would have to pay transportation costs must necessarily be indicated after the respective 'C-'term. Under the CIF and CIP terms the seller also has to take out insurance and bear the insurance cost. Since the point for the division of costs refer to the country of destination, the 'C'-terms are frequently mistakenly believed to be arrival contracts, whereby the seller is not relived from any risks or costs until the goods have actually arrived at the agreed point. However, it must be stressed over and over again that the 'C'-terms are of the same nature as the 'F'-terms in that the seller fulfils the contract in the country of shipment or dispatch. Thus, the contracts of sale under the 'C'-terms, like the contracts under the 'F'-terms, fall under the category of shipment contracts. While the seller would have to pay the normal transportation cost for the carriage of the goods by a usual route and in a customary manner to the agreed place of destination the risk for loss of or damage to the goods as well as additional costs resulting from events occurring after the goods having been handed over for carriage, fall upon the buyer. Hence, the 'C'-terms as distinguished from all other terms contain two 'critical' points, one for the division of costs and another one for the division of risks. For this reason, the greatest caution must be observed when adding obligations of the seller to the 'C'-terms referring to a time after the aforementioned 'critical' point for the division of risk. It is the very essence of the 'C'-terms to relieve the seller from any further risk and cost after he has duly fulfilled his contract by contracting for carriage and handing over the goods to the carrier and by providing for insurance under the CIF-and CIP-terms. It should also be possible for the seller to agree with the buyer to collect payment under a documentary credit by presenting the agreed shipping documents to the bank. It would be quite contrary to this common method of payment in international trade if the seller were to have to bear further risks and costs after the moment when payment had been made under documentary credits or otherwise upon shipment and dispatch of the goods. Needless to say, however, the seller would have to pay every cost which is due to the carrier irrespective of whether freight should be pre-paid upon shipment or is payable at destination (freight collect), except such additional costs which may result from events occurring subsequent to shipment and dispatch. If it is customary to procure several contracts of carriage involving transshipment of the goods an intermediate places in order to reach the agreed destination, the seller would have to pay all these costs, including any costs when the goods are transshipped from one means of conveyance to the other. If however, the carrier exercised his right under a transshipment -or similar clause- in order to avoid unexpected hindrances (such as ice, congestion, labor disturbances, government orders, war or warlike operations) then any additional cost resulting therefrom would be for the account of the buyer.
13.It happens quite often that the parties wish to clarify to which extent the seller should procure a contract of carriage including the costs of discharge. Since such costs are normally covered by the freight when the goods are carried by regular shipping lines, the contract of sale would frequently stipulate that the goods would have to be so carried or at least that they should be carried under 'liner terms'. In other cases, the word 'landed' is added after CFR or CIF. Nevertheless, it is advisable not to use abbreviations added to the 'C' terms unless, in the relevant trade, the meaning of the abbreviations is clearly understood and accepted by the contracting parties or under any applicable law or custom of the trade. In any event, the seller should not - and indeed could not- without changing the very nature of the 'C' terms undertake any obligation with respect to the arrival of the goods at destination, since the risk for any delay during the carriage is borne by the buyer. Thus, any obligation with respect to time must necessarily refer to the place of shipment or dispatch e.g. 'shipment (dispatch) not later than'. An agreement e.g. 'CFR Hamburg not later than' is really a misnomer and thus open to different possible interpretations. The parties could be taken to have meant either that the goods must actually arrive at Hamburg at the specified date, in which case the contract is not a shipment contract but an arrival contract or, alternatively, that the seller must ship the goods at such a time that they would normally arrive at Hamburg before the specified date unless the carriage would have been delayed because of unforeseen events.
14. It happens in commodity trades that goods are bought while they are carried at sea and that, in such cases, the word 'afloat' is added after the trade term. Since the risk for loss of or damage to the goods would then, under the CFR- and ClF-terms, have passed from the seller to the buyer difficulties of interpretation might arise. One possibility would be to maintain the ordinary meaning of the CFR- and ClF-terms with respect to the division of risk between seller and buyer which would mean that the buyer might have to assume risks which have already occurred at the time when the contract of sale has entered into force. The other possibility would be to let the passing of the risk coincide with the time when the contract of sale is concluded. The former possibility might well be practical, since it is usually impossible to ascertain the condition of the goods while they are being carried. For this reason the 1980 UN Convention on Contracts for the International Sale of Goods Article 68 stipulates that 'if the circumstances so indicate, the risk is assumed by the buyer from the time the goods were handed over to the carrier who issued the documents embodying the contract of carriage'. There is, however, an exception to this rule when 'the seller knew or ought to have known that the goods had been lost or damaged and did not disclose this to the buyer'. Thus, the interpretation of a CFR- or ClF-term with the addition of the word 'afloat' will depend upon the law applicable to the contract of sale. The parties are advised to ascertain the applicable law and any solution which might follow therefrom. In case of doubt, the parties are advised to clarify the matter in their contract.
'INCOTERMS' AND THE CONTRACT OF CARRIAGE
15. It should be stressed that Incoterms only relate to trade terms used in the contract of sale and thus do not deal with terms sometimes of the same or similar wording - which may be used in contracts of carriage, particularly as terms of various charter parties. Charterparty terms are usually more specific with respect to costs of loading and discharge and the time available for these operations (so-called 'demurrage'-provisions). Parties to contracts of sale are advised to consider this problem by specific stipulations in their contracts of sale so that it is made clear as exactly as possible how much time would be available for the seller to load the goods on a ship or other means of conveyance provided by the buyer and for the buyer to receive the goods from-the carrier at destination and, further, to specify to which extent the seller would have to bear the risk and cost of loading operations under the 'F'-terms and discharging operations under the 'C'-terms. The mere fact that the seller might have procured a contract of carriage, e.g. under the charterparty term 'free out' whereby the carrier in the contract of carriage would be relieved from the discharging operations, does not necessarily mean that the risk and cost for such operations would fall upon the buyer under the contract of sale, since it might follow from the stipulation of the latter contract, or the custom of the port, that the contract of carriage procured by the seller should have included the discharging operations.
THE 'ON BOARD REQUIREMENT' UNDER FOB, CFR AND CIF
16.The contract of carriage would determine the obligations of the shipper or the sender with respect to handing over the goods for carriage to the carrier. It should be noted that FOB, CFR and CIF all retain the traditional practice to deliver the goods on board the vessel. While, traditionally, the point for delivery of the goods according to the contract of sale coincided with the point for handing over the goods for carriage, contemporary transportation techniques create a considerable problem of 'synchronization' between the contract of carriage and the contract of sale. Nowadays goods are usually delivered by the seller to the carrier before the goods are taken on board or sometimes even before the ship has arrived in the seaport. In such cases, merchants are advised to use such 'F'- or 'C'-terms which do not attach the handing over of the goods for carriage to shipment on board, namely FCA, CPT or CIP instead of FOB, CFR and CIF.
THE 'D'-TERMS (DAF, DES, DEQ, DDU AND DDP)
17.As has been said, the 'D'-terms are different in nature from the 'C'-terms, since the seller according to the 'D'-terms is responsible for the arrival of the goods at the agreed place or point of destination. The seller must bear all risks and costs in bringing the goods thereto. Hence, the 'D'-terms signify arrival contracts, while the 'C'-terms evidence shipment contracts.
The 'D'-terms fall into two separate categories. Under DAF, DES and DDU the seller does not have to deliver the goods cleared for import, while under DEQ and DDP he would have to do so. Since DAF is frequently used in railway traffic, where it is practical to obtain a through document from the railway covering the entire transport to the final destination and to arrange insurance for the same period, DAF contains a stipulation in this respect in A.8.. It should be stressed, however, that the seller's duty to assist the buyer in obtaining such a through document of transport is done at the buyer's risk and expense. Similarly, any costs of insurance relating to the time subsequent to the seller's delivery of the goods at the frontier would be for the account of the buyer.
The term DDU has been added in the present 1990 version of Incoterms. The term fulfils an important function whenever the seller is prepared to deliver the goods in the country of destination without clearing the goods for import and paying the duty. Whenever clearance for import does not present any problem such as within the European Common Market - the term may be quite desirable and appropriate. However, in countries where import clearance may be difficult and time consuming, it may be risky for the seller to undertake an obligation to deliver the goods beyond the customs clearance point. Although, according to DDU B.5. and B.6., the buyer would have to bear the additional risks and costs which might follow from his failure to fulfil his obligations to clear the goods for import, the seller is advised not to use the term DDU in countries where difficulties might be expected in clearing the goods for import.
THE BILL OF LADING AND EDI PROCEDURES
18.Traditionally, the on board bill of lading has been the only acceptable document to be presented by the seller under the terms CFR and CIF. The bill of lading fulfils three important functions, namely:
- proof of delivery of the goods on board the vessel
- evidence of the contract of carriage
- a means of transferring rights to the goods in transit by the transfer of the paper document to another party.
Transport documents other then the bill of lading would fulfil the two first- mentioned functions, but would not control the delivery of the goods at destination or enable a buyer to sell the goods in transit by surrendering the paper document to his buyer. Instead, other transport documents would name the party entitled to receive the goods at destination. The fact that the possession of the bill of lading is required in order to obtain the goods from the carrier at destination makes it particularly difficult to replace by EDI-procedures. Further, it is customary to issue bills of lading in several originals but it is, of course, of vital importance for a buyer or a bank acting upon his instructions in paying the seller to ensure that all originals are surrended by the seller (so-called 'full set'). This is also a requirement under the ICC Rules for Documentary Credits (the so-called Uniform Customs and Practice, 'UCP'; ICC Publication 400). The transport document must evidence not only delivery of the goods to the carried but also that the goods, as far as could be ascertained by the carrier were received in good order and condition. Any notation on the transport document which would indicate that the goods had not been in such condition would make the document 'unclean' and thus make it unacceptable under UCP (Art.18 see also ICC Publication 473). In spite of the particular legal nature of the bill of lading it is expected that it will be replaced by EDI procedures in the near future. The 1990 version of Incoterms has taken this expected development into proper account.
NON-NEGOTIABLE TRANSPORT DOCUMENTS INSTEAD OF BILLS OF LADING.
19.In recent years, a considerable simplification of documentary practices has been achieved. Bills of lading are frequently replaced by non-negotiable documents similar to those which are used for other the modes of transport than carriage by sea. These documents are called 'sea waybills', 'liner waybills', 'freight receipts', or variants of such expressions. These non-negotiable documents are quite satisfactory to use except where the buyer wishes to sell the goods in transit by surrendering a paper document to the new buyer. In order to make this possible, the obligation of the seller to provide a bill of lading under CFR and CIF must necessarily be retained. However, when the contracting parties know that the buyer does not contemplate selling the goods in transit, they may specifically agree to relieve the seller from the obligation to provide a bill of lading, or, alternatively, they may use CPT and CIP where there is no requirement to provide a bill of lading.
THE RIGHT TO GIVE INSTRUCTIONS TO THE CARRIER
20.A buyer paying for the goods under a 'C'-term should ensure that the seller upon payment is prevented from disposing of the goods by new instructions to the carrier. Some transport documents used for particular modes of transport (air, road or rail) offer the contracting parties a possibility to stop the seller from giving such new instructions to the carrier by providing the buyer with a particular original or duplicate of the waybill. These waybills will have a 'no-disposal' clause. However, the documents used instead of bills of lading for maritime carriage do not normally contain such an 'estoppel' function. Work is in progress within the Comity Maritime International to remedy this shortcoming of the above- mentioned documents by introducing 'Uniform Rules for Sea Waybills'. However, until this work has materialized, and been followed through in practice, the buyer should avoid paying against these non-negotiable documents whenever he has any reason to mistrust his seller.
PASSING OF RISKS AND COSTS RELATING TO THE GOODS
21.The risk for loss of or damage to the goods, as well as the obligation to bear the costs relating to the goods, passes from the seller to the buyer when the seller has fulfilled his obligation to deliver the goods. Since the buyer should not be given the possibility to delay the passing of the risks and costs, all terms stipulate that the passing of risks and costs may occur even before delivery, if the buyer does not take delivery as agreed or fails to give such instructions (with respect to time for shipment and/or place for delivery) as the seller may require in order to fulfil his obligation to deliver the goods. It is a requirement for such premature passing of risk and costs that the goods have been identified as intended for the buyer or, as is stipulated in the terms, set aside for him (appropriation). This requirement is particularly important under EXW, since under all other terms the goods would normally have been identified as intended for the buyer when measures have been taken for their shipment or dispatch ('F'-and 'C'-terms) or their delivery at destination ('D'-terms). In exceptional cases, however, the goods may have been sent from the seller in bulk without identification of the quantity for each buyer and, if so, passing of risk and cost does not occur before the goods have been appropriated as aforesaid(cf. also Article 69.3 of the 1980 UN Convention on the International Sale of Goods).
REFERENCE TO INCOTERMS
22.Merchants wishing to use these rules should now specify that their contracts will be governed by 'Incoterms 1990'.
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