INCOTERMS
& their usage
Prof
Archie D'Souza
Although Incoterms 2010 will be
redundant by the end of the year. It is still current till Incoterms
2020 comes into force. Updates will be available one the same is
published.
Introduction
One of the most common set of terms used in international trade is
INCOTERMS; this is short for International Commercial Terms,
published by the International Chamber of Commerce and it’s
possibly its most read publication. It is also perhaps the best
understood and most often represented.
The purpose of this session is to understand what INCOTERMS are and
deal with some myths and misconceptions regarding the same. In this
afternoon session we will get into INCOTERM straight and arrive at
how to choose the right INCOTERM.
By the definition an INCOTERM or International Commercial Term is a
formalized international term of trade, which specifies the
responsibility of the exporter and importer in an international
transaction.
Whenever an international sales transaction takes place i.e. when an
exporter sells goods to a buyer in a foreign country, there is a host
of steps involved in getting the goods to the location required by
the buyer. This happens irrespective of whether the transaction has
taken place directly or through an intermediary.
These steps include:
Customs
clearance of goods for export
Organizing
transport of the goods from the point of origin to the location it
needs to be delivered
Clearing
customs in the importing country
Movement of goods involves a buyer, seller and transporter. An
exporter and importer enter into an agreement under which the title
of goods passes from one to another with risks also being
transferred. INCOTERMS first coined in 1936 and last published
before this in 2000, addresses some of the problems related to
international movement of goods. It tries to bring clarity and
reduces confusion about the duties and responsibilities of the seller
and buyer.
Some of the questions they address are:
At
what point should the seller deliver the goods?
At
what point are the risks passed from the seller to the buyer?
In
case goods in transit are damaged, pilfered or lost, who takes the
liability for the loss?
There are a total of eleven INCOTERMs divided into four groups, C, D,
E and F; or rather E,F, C & D. Before we list them out and
define each term let us look at some of the misconception about them,
their scope, and areas covered and not covered by them.
We shall then look at transfer of property or title, their structure
and the primary responsibilities of different parties under various
terms.
In session II tomorrow, we shall delve into how to choose the right
INCOTERM. Looked at in a proper perspective they can be a powerful
tool in buyer/seller contracts, leading to a win-win situation.
INCOTERMs deal with the relationship between seller and buyer under a
contract of sale. The distinct areas they deal with include:
Provision
of goods in conformity with the contract and paying the price of the
same.
Procuring
licenses, authorization and formalities.
Entering
into a contract of carriage and procuring insurance as may be
necessary.
Point
of delivery of goods, i.e. the transfer of ownership from seller to
buyer.
Transfer
of risks from seller to buyer.
Division
of costs between the buyer and seller.
Notice
to the buyer or seller.
Proof
of delivery, transport documents either paper or electronic.
Checking
the packing, marking etc.
The whole arrangement of INCOTERMs is based on the above heads. Each
term defines the precise obligation of the seller and buyer. It
helps give precise understanding of the objectives of the parties to
the contract. Finally, it minimizes, if not totally eliminates the
space for confusion or dispute.
In spite of their clarity, misconceptions do exist about their
applicability. INCOTERMs apply to the contract of sale and not their
carriage. They do not provide for all the duties and
responsibilities which parties may wish to include in a contract of
sale.
As indicated, INCOTERMS deal with the contract of sale, they do not
cover carriage, insurance and finance. However, when parties agree
on the use of a particular INCOTERM, there would be implication for
other contracts. For example, a CIF or CFR contract cannot be
performed without a contract of carriage. Under these terms, the
seller must present to the buyer a bill of lading, air waybill, or
any other transportation document, depending on the mode of transport
used. This is also important from the point of view of documentary
credit, something we shall be dealing with tomorrow in session II.
Here, documents required would invariably depend upon the means of
transport which may be used in a particular transaction.
INCOTERM, therefore, identify the obligation that various parties to
a transaction have; for example the seller’s obligation to place
goods at the disposal of the buyer; or hand them over for carriage;
or deliver them at the destination. Also provided for, is the
transfer of money between the transacting parties. They further deal
with the obligation to clear the goods for export/import, the
packing, the obligation to take delivery and to provide proof of any
complied with respective obligations. Thus, these terms deal with
issues which are extremely important for the implementation of the
contract of sale. Although INCOTERMs are primarily intended for use
in international trade they are also widely used in domestic sales
and purchasers.
It should be noted that INCOTERMs do not cover all possible legal or
transport issues arising out of an international sale. What the
terms do is specify the following:
The
portion of the transportation cost shared between buyer and seller.
The
point at which the risk of loss will be transferred from the buyer
to seller.
The
party responsible for handling of customs formalities and dues
payable at the origin and/ or destination.
Seller’s
responsibility for providing insurance cover in case stipulated by
the buyer.
Areas not covered under INCOTERMs include:
Transfer
of ownership and property rights.
Breach
of contract and the consequences flowing from such breach
Exemption
of liability in certain situations.
These areas need to be taken care of by providing for specific
stipulation in the contract of sale under the applicable law. It is
therefore prudent to include in the sale contract precise details on
the exact place and method of delivery, loading and unloading
charges, extent of insurance and mode of transport.
Method
of Entry into Foreign Markets
When an organization that has been focusing
in the domestic market wishes to start exporting, it needs careful
planning and thoughtful strategic thinking. In the unit on Customs
Policy and Procedures we shall
be looking at such topics as How
to Obtain an IE Code Number,
etc. We shall look here at the various marketing channels available
for international trade.
An organization may go in for indirect
exporting by using the services of an
export trading company or an
export management corporation.
It may alternatively go in for active exporting by appointing an
agent or distributor or even setting up its own representative office
in a foreign location. Joint ventures and franchising are other
methods available.
Before the organization does actively
venture into exports, the following information should be sought:
The
size of the market
The
growth potential of the market
The
exporter's potential market share
What
type of after sales support the product requires and how they will
adhere to it
Whether
a change in marketing strategy is required
The
levels of development of infrastructure in the said market
The
ability of potential buyers to handle imports
All these factors must be looked into
before a company that was predominantly selling in the domestic
market goes for exports. A core study in this area will give good
insights into the potential hazards of getting into foreign markets.
Mr.
Kumar and his wife were running a flower shop in a five star hotel in
Bangalore. Besides procuring roses, greens, carnations and
anthuriums from various parts of Karnataka and Kerela, they were
also, through a third party, selling imported flowers like orchids
and anthuriums. They were doing a roaring business.
The
couple went on a holiday to the USA where they got to see the
sophisticated flower markets in the East Coast State of Florida.
They made contact with a flower shop in Miami and offered to supply
Indian flowers and greens to them. The shop owner first asked them
to ship a consignment of samples which, if approved a firm order
would be placed.
After
returning they very enthusiastically procured the best possible
flowers and greens and booked them by air to Miami. The documents
were scanned and flight details emailed to the potential buyer. The
consignment reached Miami bang on schedule.
The
buyer, who was procuring flowers through a wholesaler, had no clue on
import formalities. He wasn't even aware that he could complete the
formalities using the services of a customs broker. The Kumars on
the other hand thought their task was over once goods were handed
over to the carrier.
The
end result was that by the time the Miami buyer was able to find out
the formalities involved the flowers had perished and so had to be
destroyed by the carrier. The cost of destruction and disposal had
to be borne by the Kumars. Thus an otherwise successful businessman
could not complete an international transaction due to lack of
experience and knowledge of customs regulations.
Before entering into foreign markets an
exporter should learn the rules and regulations and ensure that these
are adhered to.
Role
of International Chamber of Commerce
The ICC reviews
INCOTERMS from time to time to ensure that they reflect and respond
to current trade practices and trends. INCOTERMS 2020 will be the
nineth revision of INCOTERMS since their inception in 1936.
International
Agreements & Contracts – their role in trade &
transportation
Transportation and trade involve agreements between two parties –
trade, between buyer & seller and transportation between a
shipper & a carrier. Being an agreement there have to be a
minimum of two parties involved. An agreement enforceable by law is
a contract.
In other words, a contract is an agreement in which a party
undertakes to do or not do a particular thing. It describes a
transaction in which each party comes under an obligation to the
others, and each reciprocally acquires a right to whatever is
promised by the other.
A person purchasing a transportation service must know what
constitutes a contract. Also, s/he must know what should be included
in or excluded from a contract
Air/sea waybills, bills of lading and other transport documents
contain the conditions of contract of carriage. We’ll speak a
little more about these documents later.
A contract must certain elements to be considered one. These
elements are:
Agreements need not be in writing. However, in case of disputes, it
is for the aggrieved party to find a way to prove his/her point. In
case of a transportation agreement, it is therefore prudent for the
freight forwarder to get a shipper’s letter of instructions
duly signed by the shipper prior to executing the transportation
document.
Consideration is one of the tools that make a contract enforceable.
A shipper tenders goods to a transporter to move them from one
location to another for a price. This price is the consideration in
their contract of carriage.
When one or both the parties to a contract is a minor or lacks the
capacity to perform the conditions laid down in an agreement, the
same is not enforceable by law and therefore void. Similarly, an
agreement to perform an illegal or criminal act is not enforceable by
law and therefore not a contract.
Failure to discharge a contract is called a breach. A purchaser of
transportation services must have some knowledge of what remedies are
available in case of a breach of contract.
International
Contracts
An organisation involving itself in international business enters
into a number of contracts with other organisations, possibly located
in different countries. These contracts may be written or implied.
We list out some examples of what such contracts would be:
The
contract of sale between the buyer (importer) and seller (exporter)
An
insurance contract, here an insurance company would be involved
A
contract of carriage with a carrier, i.e. an airline, shipping line,
an MTO, etc.
A
documentary letter of credit with a bank
An
agreement with an agent or distributor
The possibilities are endless.
INCOTERMS
– definition & usage
As stated earlier, the ICC reviews INCOTERMS from time to time to
ensure that they reflect and respond to current trade practices and
trends. INCOTERMS 2010 is the eighth revision of INCOTERMS since
their inception in 1936. By definition, INCOTERMS are a series of
internationally recognised standardised trade terms published by the
International Chamber of Commerce (ICC) and widely used in
international sales.
Let us look at what they cover. In simple layman’s terms they
cover the following:
In addition to the above INCOTERMS also cover such issues as
insurance, export & import clearance and the division of other
costs pertaining to the delivery of goods.
Let us now look at what they don’t cover. There is nothing on
ownership/title to the goods, nothing in detail on payment
obligations, viz. when, how, what security, against what documents or
for that matter nothing on detailed vessel requirements, force
majeure, termination, insolvency, etc. In short, INCOTERMS do
not constitute a complete contract of sale. However, they provide
convenient internationally recognised rules for the sale of goods.
Now we shall look at how they are used. INCOTERMS are incorporated
into many contracts by express reference. E.g. DAP one safe berth
Rotterdam, INCOTERMS 2010. They may be referred to in standard for,
contracts. They may also provide some guidance as to the generally
accepted meaning of trade terms such as CIF/FOB/DES. However, it is
important that one expressly refers to them if one wants them to
apply.
Now, let us look at the reason they changed in 2010. It was to take
account of the spread of customs-free-zones, the increasing use of
electronic communications, concerns about security following the 9/11
tragedy and the latest developments in trade since the 2000 version
was published.
INCOTERMS 2010 was published on SEP 27, 2010 and came into effect
from JAN 1, 2011. For any contract entered into from JAN 1, 2011
onwards it will be assumed that any reference to INCOTERMS, unless
stated otherwise, will mean the 2010 version.
The following are the changes in INCOTERMS 2010 that every transport
user must be aware of:
Removal
of four terms, viz. DAF, DES, DEQ and DDU and introduction of two
terms, viz. DAP – Delivered at Place & DAT – Delivered at
Terminal
Creation
of two classes of INCOTERMS as against four for INCOTERMS 2000.
These two classes are:
Rules
for any mode or modes of transport, and
Rules
for sea and inland waterways.
Rules
which are able to serve both international and domestic trade
Express
reference to the use of the term equivalent
electronics records if the parties
agree or it is customary
Amended
insurance cover to reflect the alterations made to the Institute
Cargo Clauses
Allocation
of parties’ respective obligations to obtain or provide
information in order to obtain security-related clearances
Responsibility
for Terminal Handling Charges expressly allocated
Including
an obligation to procure goods to reflect current practices in
string sales
Let us now look at these aspects a little in detail.
Removal
of four terms from INCOTERMS 2000: We
have seen over the decades the steady growth of container traffic
all over the World. In fact, more than ever, today commodities are
being traded and moved in containers. This onward march and the
increased usage of point-to-point services have led the ICC to
introduce two new Delivered
terms. Delivered at Place (DAP)
should be used in place of DAF, DES & DDU. Additionally
Delivered at Terminal (DAT) replaces
DEQ. These new terms may be used irrespective of the agreed mode of
transport. The main reason for fewer terms/simplifications was that
traders often chose a term incorrectly or muddles terms leading to
contradictory or unclear terms.
Creation
of two rather than four categories of terms: The
11 INCOTERMS, as against 13 in the 2000 version, have been
categorized under two categories:
Deliveries
by any mode of transport: EXW, FCA,
CPT, CIP, DAP & DDP may all be used where there is no maritime
transport at all; and
Deliveries
by sea/inland waterway: FAS, FOB, CFR
& CIF
These
changes have been made to make the new INCOTERMS easier to use
Adapted
Rules: The new INCOTERMS are expressly
stated to be for both domestic and
international trade. This is achieved
by statements within the rules that the obligation to comply with
export/import formalities exists only where applicable. For trade
blocs like the EU & NAFTA, where border
formalities have largely disappeared
and in the US where there has been an increasing willingness to use
INCOTERMS rather than the former Uniform Commercial Code shipment
and delivery, the new terms are now easier to apply.
Electronic
Records: The buyer’s and seller’s
obligations to provide contractual documentation may now be by
electronic record if agreed between the
parties or customary reflecting the
recognition by the ICC of the increasing importance and contractual
certainty, owing to speed of transfer, provided by electronic
communication. This will also future
proof INCOTERMS 2010 as electronic
procedure/communications develop over time
Institute
Cargo Clauses: WHERE an INCOTERM
requires that one party obtains insurance, the insurance
requirements have been amended to reflect the changes to the
Institute Cargo Clauses. The parties’ obligations regarding
insurance have also been clarified.
Security:
The issue of security of
goods/vessels, etc. is now at the front of most people’s minds
when considering international trade. Given that many countries now
require heightened security checks, the rules now require that both
parties are obliged to provide all necessary information, e.g. the
chain of custody information, in order to obtain import/export
clearance. The 2000 version did not require this degree of
cooperation.
Terminal
Handling Charges: Where the seller is
required to arrange and pay for carriage of goods to an agreed
destination under CIP, CPT, CFR, CIF, DAT & CCP terms, it may be
the case that terminal handling charges
are passed on to the buyer as part of the contractual price of
goods. However, historically, in some cases, the buyer also had to
pay the terminal for this service amounting to a double charge.
String
Sales: In contracts for the sale of
commodities
as opposed to manufactured goods, it is often the case that a cargo
is sold in high-seas
a number of times when it’s on board a vessel, a term called
string sales.
In such situations, sellers in the middle of the string do not ship
the goods, as the goods are in high seas, being shipped by the
seller at the top of the string. As such, the obligation on sellers
in the middle of the string is to procure the goods that have been
shipped. The new INCOTERMS clarify this by including an obligation
to procure goods shipped
as an alternative to the obligation to ship goods.
Considering the improvements and simplifications, the ICC expects
INCOTERMS 2010 to be well received by most, if not all, sections of
the trade. However, as with any change, work is required within
trading companies and service to make sure that they are ready for
this change. This is where the need for a programme like this one
comes in. They will have to make the necessary amendments to their
standard contracts for future sales & purchases. If the
companies do not incorporate these changes, it could be a potential
recipe for disputes.
Incoterms®
2020 rules, what to expect and what not to
Incoterms®
have been developed and published periodically by the ICC to
facilitate international trade. Like we've seen, they've been
designed to aid parties that trade in goods internationally to
interpret the terms of trade that two parties to a contract of sale
and purchase agree to apply. As we've seen, they were first
introduced in 1936 and periodically revised in 1957, 67, 76, 80, 90,
2000, and 2010. these revisions were made to accommodate changes as
global trade developed and evolved. The current version of Incoterms
rules is the 8th
so published. Today, they are used worldwide, not just for
international sales and purchases but for domestic trade as well.
They are an internationally recognized and accepted set of standards.
So universal is their acceptance, that they have become an essential
part of day-to-day international and domestic trade.
We
will, at a later stage, be taking a detailed look at the history
of the Incoterms.
It
is essential to look at it because, besides being interesting, it
highlights their importance. For over eight decades now, they have
been the cornerstone of international trade is goods. They have
created the basis for robust trade negotiations. We have seen earlier
how various service providers take part in the international movement
of goods and the steps involved to pick goods up from the seller's
premises and deliver them at the buyer's. Some of these steps may not
apply to domestic movements and transactions. Some of the
service-prociders include carriers – viz. shipping lines, airlines,
truckers, MTOs, etc. – forwarders, customs, port & airport
authorities, banks and several more. These reules have been designed
by expert practitioners acting on behalf of the ICC.
Incoterms
2010 was published in September 2010 and came into effect from
January 1, the following year. Incoterms 2020 will replace Incoterms
2010 from january 1, 2021.
is
it possible for scrupulous elements to take advantage of the situation,
using devious methods? As with any legitimate business organisation
or transaction, it is possible. Let us see how.
To
begin with, the ICC has announced that it is coming up, some time in
2019, with a new edition of which will be christened Incoterms 2020.
Several scrupulous fly-by-night operators, claiming to be educational
and training institutions, have already started offering sessions on
Incoterms 2020. May be they have access to information that even
senior ICC officials don't.
Many,
in fact I'd say most, service-providers and users are not aware of
the latest rules. It isn't uncommon to receive a request with terms
mentioned as FOB, with an airport being mentioned. FOB is a term to
be used only for non-containerized water transport. The same applies
for FAS, CIF and CFR. FCA, CPT and CIP are the terms to be used for
other modes of transportation. Similarly, DAP and DAT are terms
introduced in 2010, with certain terms being rendered redundant. To
assist users and service-providers, the ICC has innued a notification
entitled 3
ways to spot fake Incoterms® rules.
Every
service-provider
and user should note the following:
The
Drafting Group for Incoterms 2020 was formed and convened by the
ICC in 2016. It combines the collective knowledge and expertise of
eight recognized specialists from across the world. Its mandate is
to finalise the latest update to the Incoterms rules. Since its been
convened, it has met several time. The members of the group propose,
discuss and analyse more than 3000 substantial suggestions and
comments made by ICC national committees.
So,
how does one spot a misleading website or organisation? To begin
with, the fact that they're offering a training programme on
Incoterms 2020 before it is published is one sure sign. One should
remember that Incoterms is an official trademark of the ICC and it
should be acknowledged as such.
The
second thing one should note is the language that these operators
use. While suggestions are fine, predictions aren't. Of course these
suggestions should be made to the ICC. Users and service-providers
should be careful about such fly-by-night operators and so-called
experts, whose sole purpose is to make money and not impart
knowledge. Following their lead could be detrimental to business.
Please wait for the release of the next edition before one attends
such training sessions.
The
release of the next edition of Incoterms is months away. While, it
is still okay to conduct sessions on the general principles of
Incoterms, doing the same on Incoterms 2020 is not. The current
edition in use is Incoterms 2010 and, before that, it was Incoterms
2000. Anyone offering sessions suffixing it with any other year,
e.g. 2015, 2017, etc. is fraudulent. Till Incoterms 2020 comes into
force Incoterms 2010 will continue to be the one applicable.
Having
said this, several textbooks, even those published as late as this
year, still use older versions. This too needs to be corrected.
Students and professionals must keep themselves updated with the
latest.
