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Blog Topic: What are Incoterms® and why does my e-commerce business need to know about them?

24.11.2021
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Introduction

If you have ever ordered something from overseas, whether its that new laptop you’ve had your eye on that you just can’t find in South Africa or a big delivery of goods from your international supplier, you’ll have noted (hopefully) that the delivery terms in your contract mentioned a three-digit code, and you were likely just expected to know what that meant. This article will provide you with the information that you need so that you don’t just giggle nervously, sign the agreement, and hope for the best.

What are Incoterms®?

The three-digit codes referred to above are known as “Incoterms®”, which is an abbreviated form of “International Commercial Terms”. These terms were created by the International Chamber of Commerce (who, interestingly, holds a trademark over them) to refer to common practices in relation to international trade agreements. First published as Incoterms in 1936, they are the result of research and much legal thought commencing in 1923, and are currently in their ninth revision (known as Incoterms 2020). They are widely used in commercial transactions, procurement processes, and sales agreements (particularly involving an international freight component).

As will be elaborated on below, these terms are intended to allow the contracting parties clarity on their duties/obligations with regard to the international transportation of goods, their liability for costs, and the passing of risk in and to the goods from one party to the other. These factors, and in particular the element of the passing of risk, are often a cause for misunderstanding and, therefore, dispute.

What follows is an explanation of each three-digit code, and the relevant information pertaining to the aforementioned three factors.

EXW – Ex Works

This refers to the situation where the seller makes the goods that are the subject of the sale available for collection by the buyer at their place of business, or at another named place. The buyer accordingly bears the risk of ensuring that the goods reach their final destination, and the costs involved. All liability of the seller ends at the point where the goods are delivered to the named place. The seller is not responsible for loading the goods on carrier vehicles for collection, but if they do so, the buyer bears both the risk and the cost for that.

FCA – Free Carrier

In a Free Carrier arrangement, the seller delivers the goods (which have already been cleared for export) to a mutually agreed place. This is usually the premises of the carrier nominated by the buyer, or to another place that the buyer determines.

If the parties agree that the seller will deliver the goods at their own premises (or at another place that the seller controls or owns), then the seller is generally responsible for loading the goods onto the carrier vehicles. If, however, the parties agree that the seller will deliver the goods to any place other than a place controlled by the seller, the buyer is liable both for unloading the goods, and loading them onto the carrier. The buyer would assume both the cost and risk thereof.

CPT – Carriage Paid To

With this term, the seller pays the costs involved in transporting the goods to their final destination. This includes aspects such as export clearance to the named place of delivery, and freight costs. For the purposes of determining liability however, the goods would be considered to have been delivered when they are delivered by the seller to the carrier, therefore the risk transfers to the buyer at that point.

CIP – Carriage and Insurance Paid To

CIP is very similar to CPT. The only difference is that the seller is required to insure the goods whilst they’re en route to their final delivery point. CIP suggests that the seller should insure the goods for 110% (one hundred and ten percent) of their replacement value, unless the parties vary this percentage by agreement. It is a good idea to ensure that the insurance policy is in the same currency as the contractually agreed cost of the goods. The insurance policy should allow the buyer or the seller (or, indeed, anyone else with an insurable interest in the goods) to make a claim.

DPU – Delivered at Place Unloaded

In this arrangement, the seller is required to cause the goods to be delivered to a destination and unloaded, and assumes all cost and risk up to that point. It is crucial to note that the seller is liable for unloading the goods at the destination and making them available for the buyer. All charges after unloading must be for the buyer’s account.

DAP – Delivered At Place

This Incoterm® is similar to DPU, but the major difference is that the buyer assumes all cost and risk from the point where the goods reach their destination, and the seller is not liable for unloading the goods. The buyer is also responsible for all customs clearing processes in the destination country.

DDP – Delivered Duty Paid

This is similar to DAP, but here the seller is responsible for all costs involved in transporting the goods, including customs duties and taxes. The seller is not responsible for offloading the goods, and the buyer becomes liable for costs and bears the risk of the goods as soon as the goods reach the destination port of entry.

The above codes have dealt with international trade in all forms (including air, rail, and sea). The following codes relate to rules for sea and inland waterway transport exclusively:

FAS – Free Alongside Ship

The seller is deemed to have effectively delivered the goods when they have caused them to be placed next to the ship that the buyer will be using. The buyer will assume all risk and costs from that point onwards.

FOB – Free on Board

The seller bears all cost and risk until the goods are actually loaded on board the buyer’s (or their nominee’s) ship. It is important to note that the buyer must designate a vessel for the seller to deliver the goods to. The seller must arrange for export clearance, but the buyer assumes all other costs.

CFR – Cost and Freight

This term is similar to CPT in that the seller pays all costs for the transport of the goods up to the pre-agreed destination, and risk transfers to the buyer when the goods are delivered by the seller to the carrier, and loaded on board the ship in the exporting country. The seller is responsible for export clearance costs, and the costs of shipping the goods, but is not responsible for insurance.

CIF – Cost, Insurance and Freight

CIF is similar to CFR, but the difference comes in that the seller is responsible for insuring the goods while they’re being shipped. The seller’s liability ends and transfers to the buyer when the seller provides the buyer with the necessary documentation to either obtain the goods from the carrier, or to institute a claim against the insurer. These documents include the bill of lading, the invoice, and the insurance policy documentation.

Conclusion

Now that things have been explained to you in a bit more detail, our hope is that you will be more prepared for international negotiations now that you understand the considerations and factors that apply when you hear or see an Incoterm®. Please don’t hesitate to get in touch with Legalese if you receive an agreement, correspondence, or any other documentation that lists one of these terms and you’re unsure how to proceed.

– Kyle Freitag

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