16 March 2006
Students must now show knowledge of international issues. Dave Dearing examines the details of Incoterms and explains why they are essential when conducting international business deals
It is essential that all students have a basic understanding of Incoterms as part of the "international issues" strand in the new CIPS qualification. Incoterms (International Commercial Terms) provide a standardised common language for buyers and sellers conducting international business deals.
It is a contractual code made up of abbreviations, devised by the International Chamber of Commerce and first published in 1936. Incoterms have been amended and modernised several times, most recently in 2000, to adapt them to current international trade practices.Purpose of Incoterms
The main function of Incoterms is to eliminate barriers caused by distance, language, and local business practices, to banish different interpretations of trade terms on a worldwide scale and to reduce risk and time wasted by misunderstandings, disputes and litigation. They provide a universal vocabulary which is now accepted by all the major international financial institutions.
Incoterms spell out who is responsible for:
- Risk of loss
- Export licensing and customs clearance
- The contract of carriage
- Contract of insurance
However, trade terms produced using Incoterms constitute only part of the contract of sale. Trade terms deal with the questions relating to delivery of the goods but the contract of sale should still determine the quantity, specification and quality of the goods, as well as the price to be paid.
Incoterms only deal with the questions of division of risk, or of loss, or of damage to the goods. They do not deal with property rights. So they do not relate to the transfer of property or transfer of title to the goods.
Furthermore, Incoterms do not deal with breach of contract and any consequences that flow from breach. Such matters can only be resolved using the terms that are provided for within the contract of sale between the parties. An international trade deal can involve up to four contracts: the contract of carriage, the contract of sale (usually involving incoterms), the insurance contract and the contract of finance.Incoterms 2000
details 13 different terms in total. Each has a three-letter code and the four categories of terms are identifiable by the first letter of the term.
Under the "E" term (EXW), the seller only makes the goods available to the buyer at the seller's own premises. It is the only one in that category.
Under the "F" terms (FCA, FAS and FOB), the seller is called upon to deliver the goods to a carrier appointed by the buyer.
Under the "C" terms (CFR, CIF, CPT and CIP), the seller has to contract for carriage but without assuming the risk of loss or damage to the goods or additional costs due to events occurring after shipment or dispatch.
Under the "D" terms (DAF, DES, DEQ, DDU and DDP), the seller has to bear all costs and risks needed to bring the goods to the place of destination.
Remember that with nearly all the terms there can be substantially more costs that the buyer has to pay before taking delivery. Transport methods
The terms can also be divided into recommended usages by modes of transport. Certain Incoterms are used for more than one method of transport. Others are restricted to moves where the main carriage is by sea transport only.
- All modes (for example, combined transport) use EXW, FCA, CPT, CIP, DAF, DDP, DDU.
- Conventional port-to-port sea transport uses FAS, FOB, CFR, CIF, DES, DEQ.
It is up to the seller to ensure that the correct terms are used. Consider, for example, a containerised contract applying FOB or CFR where the risk transfers from seller to buyer on loading on board ship. On delivery damage is discovered, but it is impossible to show whether the damage arose before or after shipment. Under FOB/CFR a dispute would ensue; under FCA/CPT it would be clear that the risk would be with the buyer once goods are in the hands of the combined transport operator for carriage.
The ICC recommends that Incoterms 2000
be referred to specifically, with a location. So the term "Delivered at Frontier (DAF)" should be accompanied by a reference to an exact place and the frontier to which delivery is to be made. Variations such as "EXW loaded" of the three-letter Incoterms should be avoided.
Here are three examples of correct use:
- FCA New York Incoterms 2000
- FOB Hull Incoterms 2000
- DDU Alpha Pressings PLC Leeds Warehouse Incoterms 2000
It is important to incorporate Incoterms correctly into the contract. Simply stating "FOB" on a purchase order could lead to lengthy problems in the event of a dispute.
Don't worry about remembering all 13 terms but make sure that you can explain at least two or three major terms, such as EXW, FOB and CIP.
If you are importing, obtain a full copy of Incoterms 2000
and guidance notes from the ICC at www.iccwbo.orgDave Dearing is a CIPS senior assessor and examiner