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Contents
1 History and purpose of the rules ............................................................................. 1
2 Use of the Incoterms rules....................................................................................... 3
3 The logic of the rules................................................................................................ 5
3.1 “All transport modes” or “Sea & inland waterway only” ................................. 5
3.2 Who pays for main transport ............................................................................ 8
3.3 Where does risk transfer – before or after main transport? ........................... 9
4 How is an Incoterms rule chosen? ......................................................................... 10
5 The rules in detail................................................................................................... 11
5.1 Ex Works EXW ................................................................................................. 11
5.2 Free Carrier FCA .............................................................................................. 13
5.3 Carriage Paid To CPT ....................................................................................... 15
5.4 Carriage & Insurance Paid To CIP .................................................................... 17
5.5 The “arrival” rules DAT, DAP, DDP – general considerations ......................... 19
5.6 Delivered At Terminal DAT.............................................................................. 22
5.7 Delivered At Place DAP ................................................................................... 24
5.8 Delivered Duty Paid DDP ................................................................................. 26
5.9 Free Alongside Ship FAS .................................................................................. 28
5.10 Free On Board FOB ...................................................................................... 29
5.11 Cost & Freight CFR ....................................................................................... 31
5.12 Cost Insurance & Freight CIF ....................................................................... 33
5.13 Qualifications of an Incoterms rule. ............................................................ 35
6 The US perspective ................................................................................................ 36
6.1 Incoterms rules vs the Uniform Commercial Code ......................................... 36
6.2 Ex Works, EAR and routed transactions ......................................................... 37
Appendix A: Letters of credit and collections .............................................................. 38
I. What are letters of credit and collections? ........................................................... 38
II. How the Incoterms rules work with letters of credit ............................................ 40
III. Practical steps with the “F” rules ....................................................................... 41
IV. Letters of credit in practice - things to watch for .............................................. 42
V. Checklist for the transport document ................................................................... 45
Appendix B: Freight insurance and the rules ............................................................... 46
Incoterms 2010: A practical guide p. 1
1 History and purpose of the rules
The global economy and modern logistical networks give both importer and
exporters unprecedented opportunities for doing business with counterparties in
other parts of the world.
However when trading partners use different languages, legal systems and practices
for the movement of goods, it is vital to avoid misunderstandings and to achieve
precision as to how transactions are to be conducted.
The ICC created the first edition of the Incoterms rules back in 1936. It immediately
gained widespread acceptance in the international business community, and has
been revised from time to time to reflect changes in trading and transport practices.
The most recent revision is Incoterms 2010, which replaced the previous edition,
Incoterms 2000.
Incoterms 2010 consists of eleven packages of provision, designed to suit typical
requirements of international business. Each of these Incoterms rules is identified
by a name and by three-letter abbreviation – for example: “CIP Carriage and
Insurance Paid to”
By agreeing on the use of one of the eleven Incoterms rules and incorporating it into
their commercial agreement, buyer and seller can quickly and efficiently achieve
precision and clarity on a wide range of issues, including:
• Transport – who will arrange and pay for transport, and to what destination?
• Loading and unloading of goods
• Responsibility for export and import procedures and payment of applicable duty
and taxes
• Where during the journey responsibility for the goods passes from the seller to
the buyer – important in the event of loss or damage
The details of the rules are set out in the ICC publication no. 715 “Incoterms 2010:
ICC rules for the use of domestic and international trade terms.
This is available from the ICC Bookstore. http://store.iccwbo.org/
It is available in various languages, and in both conventional print and digital formats.
This publication is essential reading for those responsible for the development of an
Incoterms policy, and for negotiating agreements with trading partners and service
providers such as carriers and freight forwarders.
Incoterms 2010: A practical guide p. 2
NOTE: The selected Incoterms rule will be part of the commercial agreement between the buyer and seller. It will not be part of the agreement between either party and service providers such as carriers and freight forwarders. The party who arranges carriage should ensure that the terms and conditions of the carriage contract align with the selected Incoterms rule.
Incoterms 2010: A practical guide p. 3
2 Use of the Incoterms rules
The agreed Incoterms rule should be included in the commercial agreement in a
form such as this:
Note these three elements:
• The three-letter abbreviation – in this case CIP, which stands for Carriage and
Insurance Paid
• A place, Hong Kong Terminal 4. This is the destination to which the seller has
contracted to transport the goods. This should be defined as precisely as
possible, as many transport hubs are very large.
This place will have a defined meaning within each of the rules. For some rules –
but not all – it will be the point where risk transfers from seller to buyer.
(However as you will see later, for the CIP Incoterms rule and other the point of
risk transfer is earlier in the journey, before the main transport)
• The rubric “Incoterms 2010” indicates the revision of the rules that should apply.
This will normally be the latest revision. However trading partners with complex
agreements that they do not want to revise are free to specify earlier revisions
such as Incoterms 2000.
CIP Hong Kong Terminal 4 Incoterms 2010
Incoterms 2010: A practical guide p. 4
Note: There are some key aspects of the commercial agreement on which
the Incoterms rules are silent. For example:
• The rules deal with the transfer of responsibility for the goods, but they say nothing about transfer of ownership or title.
(This omission is intentional, because these concepts are subject to different treatments in various legal systems.)
• The rules say nothing about how and when the goods are to be
paid for, e.g. whether this is to be payment in advance, open account, use of letters of credit or collections
• The rules say nothing about remedies for breach of contract or how disputes are to be dealt with
So these matters need to be addressed in the commercial agreement
Incoterms 2010: A practical guide p. 5
3 The logic of the rules
The eleven rules may be classified according to these three criteria.
• Applicable transport methods.
Seven rules (EXW, FCA, CPT, CIP, DAT, DAP, DDP) can be used for any
transport mode (road, sea, air, rail etc.), or where the journey involves more
than one transport mode.
However four rules (FAS, FOB, CFR, CIF) can only be used for transport by sea
or inland waterway.
• Who arranges and pays for the main transport – buyer or seller?
• Where the seller arranges the main carriage, where does risk transfer from
seller to buyer – before or after the main carriage?
Let’s look at each of these aspects in turn
3.1 “All transport modes” or “Sea & inland waterway
only”
What is the significance of this distinction?
When the Incoterms rules were introduced in 1936, the standard mode of
international transport was by sea, and goods were typically loaded as individual
items (crates etc.) into the hold of the ship. To accomplish this, sellers delivered the
goods directly to the quay alongside the vessel.
The “sea and inland waterway” rules reflect this traditional mode of delivery and
loading, with the transfer of responsibility from seller taking place once the goods
have been loaded on board the vessel (or as expressed in the earlier Incoterms
revisions, when the goods have crossed the ship’s rail.)
With the advent of containerisation, all this changed. At container terminals, sellers
do not have direct access to the vessel. Instead, sellers deliver containers to
container yards or depots operated by the terminal, for later transfer to the vessel.
Once the container has been taken in charge by the terminal operator, the seller has
given up effective control of the goods.
Consider now the consequence of an accident at the terminal causing damage to the
container before it is loaded. Under the application of a “traditional” Incoterms rule
Incoterms 2010: A practical guide p. 6
such as CIF, the seller is still responsible for the goods, even though security and
effective control of the goods is now in the hands of the terminal operator.
A dramatic example of why these distinctions matter was the Japanese tsunami in
March 2011, which wrecked the Sendai container terminal, damaging many
hundreds of consignments awaiting loading. As a consequence, exporters using the
“traditional” Incoterms rules (FOB, CFR and CIF) found themselves facing losses that
could have been avoided.
The principle of risk transferring from seller to buyer at the point where the goods
are taken in charge by the carrier also applies to air transport and to multi-modal
operations.
In today’s integrated logistical systems, it is not uncommon for a consignment to go
through several transport stages before getting loaded onto a container vessel.
For example a “less than container load” consignment (LCL) may be collected by
truck by a “carrier” who does not own any ships (NVOCC or non-vessel operating
common carrier); then taken to a freight forwarder’s depot where it is consolidated
with other goods to create a full container load; then taken to a container freight
station before being loaded onto the ship.
Let us consider the implications of using an “all transport modes” rule such as
Carriage Paid To (CPT) versus a “sea and inland waterway only” rule such as Cost and
Freight (CFR).
In this scenario, if the Incoterms rule is CPT (destination), then the seller is “off risk”
from the moment the goods are first collected. However with the Incoterms rule
CFR, the seller remains at risk until the container is loaded onto the ship.
The practical implication is that the seven “All transport modes” rules are the rules of
choice for all movements of goods except those where the seller has direct access to
the ship for loading.
In these cases, one of the four “Sea or inland waterway only” rules is appropriate.
Such transactions will include:
• transport of bulk commodities such as oil, minerals, grain, etc., where loading
takes place from specialised installations
• heavy machinery or plant that is too large to be containerised
• loose “break-bulk” cargo where individual items are loaded onto the vessel.
Incoterms 2010: A practical guide p. 7
ALL TRANSPORT MODES SEA & INLAND WATERWAY ONLY
Ex Works EXW
Free Carrier FCA
Free On Board FOB Free Alongside Ship FAS
Carriage Paid To CPT Carriage and Insurance Paid To CIP
Cost and Freight CFR Cost Insurance and Freight CIF
Delivered At Place DAP Delivered At Terminal DAT Delivered Duty Paid
Use for: Containerised goods, multi-modal transport, air and road freight etc.
Use for: Bulk commodities, large machinery, break-bulk cargo loaded directly onto vessel
This recognition of the different requirements for containerised traffic is not new – it
is a feature of the 1990 revision of the rules, and all subsequent revisions.
Unfortunately historic practices within the industry can be resistant to change. So it
is still very common for importers and exporters to seek to use the “traditional” rules
FOB, CFR and CIF inappropriately, usually on the grounds that “we have always done
it this way” or “this is how our counterparty (or the bank or the customs authorities)
want it done”
Incoterms 2010: A practical guide p. 8
3.2 Who pays for main transport
As you can see from this table, for EXW and all the “F” rules, the buyer pays for the
main transport.
However for the “C” and “D” rules, the seller pays for main transport.
ALL TRANSPORT MODES SEA & INLAND WATERWAY WHO PAYS?
Ex Works EXW
Buyer pays for main transport
Free Carrier FCA
Free On Board FOB Free Alongside Ship FAS
Buyer pays for main transport
Carriage Paid To CPT Carriage and Insurance Paid To CIP
Cost and Freight CFR Cost Insurance and Freight CIF
Seller pays for main transport
Delivered At Place DAP Delivered At Terminal DAT Delivered Duty Paid
Delivered At Place DAP Delivered At Terminal DAT Delivered Duty Paid
Seller pays for main transport
As you will see in the next section, the major difference between the “C” and the “D”
rules is where in the journey the risk transfers from the seller to the buyer.
Incoterms 2010: A practical guide p. 9
3.3 Where does risk transfer – before or after main
transport?
Where the buyer arranges the main transport – Ex Works, Free Carrier, Free
Alongside Ship, Free on Board – then it is logical that the risk should transfer from
seller to buyer before the journey.
However when the seller arranges the main transport, there are two possibilities.
• For the “C” rules – Carriage Paid To, Carriage and Insurance Paid To, Cost and
Freight, Cost Insurance and Freight – risk transfers from seller to buyer BEFORE
the main transport.
• But for the “D” rules – Delivered At Terminal, Delivered At Place, Delivered Duty
Paid – the seller retains responsibility for the goods throughout the main
transport, and until they have been delivered to the specified place
ALL TRANSPORT MODES SEA & INLAND WATERWAY
Ex Works EXW
Buyer pays for main transport
Free Carrier FCA
Free On Board FOB Free Alongside Ship FAS
Buyer pays for main transport
Carriage Paid To CPT Carriage and Insurance Paid To CIP
Cost and Freight CFR Cost Insurance and Freight CIF
Seller pays for main transport, but seller is “off risk” during transport
Delivered At Place DAP Delivered At Terminal DAT Delivered Duty Paid
Seller pays for main transport, remains “on risk” during transport
This special feature of the “C” rules has some important implications, which will be
explained in the detailed coverage later on.
One of the implications is that when a C rule is cited, e.g. “CIP Long Beach California
Terminal 3 Incoterms 2010”, it is not apparent from this where the buyer will assume
risk for the cargo – the destination of the goods is stated, but not the place where
the goods are taken in charge before the journey.
Incoterms 2010: A practical guide p. 10
4 How is an Incoterms rule chosen?
Before moving on to the detailed provisions of the eleven rules, let’s look at some of
the major factors that buyers and sellers may consider when deciding on a suitable
Incoterms rule.
• Skills and resources of the parties – a buyer or seller with limited experience of
international trade may be happy to limit their obligations and leave as much of
the work as possible to the other party.
• Relative volumes of international business. A large company that does a lot of
importing or exporting will have existing relationships with carriers and other
service providers, and will be able to obtain better rates than a smaller one –
freight rates are usually highly dependent on volumes that the customer can
commit to.
• Policy and/or appetite with respect to controlling as much of the transaction as
possible. An exporter may regard the timely and efficient delivery of the goods as
an important aspect of overall product quality, and so will wish to have maximum
control over the transport arrangements
• Risk issues around local transport infrastructure and/or bureaucracy. For
example, an exporter sending goods to a country with unreliable transport
infrastructure and inefficient customs procedures may wish to avoid
responsibility for delivering the goods to the buyers’ premises and for clearing the
goods for import.
Incoterms 2010: A practical guide p. 11
5 The rules in detail
5.1 Ex Works EXW
This rule represents the minimum cost and responsibility for the seller, and the
maximum cost and responsibility for the buyer. The seller is obliged to do little
more than make the goods available at their premises, packed and ready for
collection by the buyer or the buyer’s appointed carrier.
Risk transfers from seller to buyer as soon as the goods have been made available,
i.e. before they have been loaded onto the vehicle – even though the seller may be
better placed to undertake loading.
The buyer is responsible for any export clearance procedures; for loading the goods
and transporting them at their own cost and risk; for import procedures and
payment of any duty or local taxes.
Inexperienced exporters are attracted by the apparent simplicity of this rule.
However there are very significant pitfalls for both the buyer and the seller.
The most important of these is that of export clearance. This is the only rule in
which the buyer, and not the seller, is responsible for export clearance. This will
usually be done by the buyer-appointed freight forwarder or carrier using
information that the seller will need to supply.
However in many countries exporters need to engage with the local authorities for
many reasons – for example, to demonstrate compliance with embargos or
restrictions on dealing with questionable persons, business entities or countries. US
exporters should take particular note of the concept of US Principal Party in Interest
(USPPI), which places obligations on the seller that cannot be avoided by use of the
Ex Works rule.
In summary, Ex Works may be practical for domestic sales or for sales within an
economic area such as the EU.
However in most other cases, the exporter should consider FCA - Free Carrier
(exporter’s premises)
Incoterms 2010: A practical guide p. 12
The provisions of Free Carrier are very similar to those of Ex Works, except that the
exporter is obliged to undertake export procedures.
One important use of Ex Works is as a well-understood basis for quotations – it
represents the cost of the goods themselves - packed, but without any of the
“extras” – transport, loading and unloading, duties, insurance and so on. Buyers
who are familiar with these others costs, or who have their own logistical contracts,
can assess the merits of the offer and make their own decisions.
Things to watch for.
Packing.
This rule obliges the seller to package the goods, at their own expense, in a manner
appropriate for their transport. However a danger arises if an agreement is reached
before the mode of transport has been decided or communicated to the seller –
different transport modes have their own packaging requirements. So it is
important for the seller to establish the proposed transport mode, include this in the
commercial agreement and then pack the goods accordingly.
If the goods need to be loaded into a container for transport, then this will not be
covered by the seller’s obligations under the Ex Works rule – responsibility for this
will need to addressed in the commercial agreement
Loading of the goods
The Ex Works rule does not oblige the seller to load the goods onto the buyer’s
vehicle. The seller will often be better placed to do this, and most sellers are willing
to load the goods as a matter of general convenience. However unless agreed
otherwise, loading of the goods will be at the buyer’s risk.
Diversion of goods.
An exporter may have purely commercial concerns about the actual destination of
the goods.
Consider a manufacturer who has a long-standing, exclusive arrangement with a
distributor for all domestic sales.
They receive an order for export to a distant overseas country. They proceed to deal
with this buyer on Ex Works terms, only to find that the goods are never exported,
but find their way onto the domestic market!
Incoterms 2010: A practical guide p. 13
5.2 Free Carrier FCA
This very flexible rule can be used for all situations where the buyer assumes
responsibility for the main carriage to the buyer’s destination.
The seller delivers the goods, cleared for export, to the named place, which can be a
terminal, a transport hub, a freight forwarder’s warehouse etc.
Delivery takes place when the goods are made available to the carrier at the named
place, still loaded on the arriving vehicle.
There is an important usage of this rule – Free Carrier (sellers’ premises.) In this
case, the goods are collected from the seller’s factory or depot. Delivery is
completed when the seller has loaded the goods onto the carrier’s vehicle.
(NB this is an important difference from Ex Works, where the buyer is responsible for
loading onto the vehicle.)
Free Carrier (sellers premises) is very often a more appropriate choice of rule than Ex
Works – the latter can pose all sorts of problems around the outsourcing of export
clearance. (See Ex Works above for more on this.)
Free Carrier can be used for all transport modes and for multi-modal operations. It
is also suitable for groupage and consolidation situations.
This rule should not be used where
• the goods are transported by sea or inland waterway only
and
• the seller has direct access to the vessel or to the quay for purposes of loading
Examples where Free Carrier should not be used include transport of bulk
commodities such as oil, mineral ore, grain etc. – usually handled by special-purpose
equipment at the terminal; large machinery that cannot be containerised; other
“break-bulk” cargo where items require individual loading.
Incoterms 2010: A practical guide p. 14
In such cases, the appropriate rules are “Free On Board FOB” – delivery is completed
when goods have been loaded on board the vessel – and “Free Alongside Ship FAS” –
delivery is completed when goods are place alongside the ship at the specified place.
Things to watch for
Where does the risk transfer?
If there is more than one carrier, then risk transfers to the buyer when the goods
have been delivered to the first carrier, unless otherwise specified in the commercial
agreement. This may be an issue for the buyer if the first carrier is a small company
with limited financial or other resources for dealing with problems.
Packing
This rule obliges the seller to package the goods, at their own expense, in a manner
appropriate for their transport. However a danger arises if an agreement is reached
before the mode of transport has been decided or communicated to the seller –
different transport modes have their own packaging requirements. So it is
important for the seller to establish the proposed transport mode, include this in the
commercial agreement and then package the goods accordingly.
Containers
The Incoterms 2010 rules are clear that loading goods into containers is a separate
issue from packaging of the goods. So if the buyer or buyer-appointed agent is
expecting to take delivery of a loaded container, this should be spelled out in the
commercial agreement.
Incoterms 2010: A practical guide p. 15
5.3 Carriage Paid To CPT
This is one of four rules where the seller is responsible for arranging and paying for
transport to the named place, but where delivery and transfer of risk take place at an
earlier point before the main carriage.
For example, if the Incoterms rule for a consignment is CPT Pier T Long Beach,
California, an exporter in the UK may deliver a container to the carrier at Felixstowe
(UK), and contract with the carrier for transport to the named place (Long Beach).
The key point is that delivery and transfer of risk takes place before the main
carriage, when the container has been taken in charge by the carrier, and not at the
destination place named in the Incoterms rule.
So when this rule is used, the details of the journey, including the delivery point,
must be included in the commercial agreement – note that the Incoterms reference
will only mention the destination point.
This rule is appropriate for all modes of transport, and for multi-modal operations.
It is one of the rules of choice for containerised movements, which constitute the
vast majority of sea cargo operations.
This rule does not oblige the seller to take out cargo insurance for the consignment –
see “Carriage & Insurance Paid to CIP” if the seller is required to provide this. So
buyers may wish to take out their own cargo insurance, covering the point of delivery
through to the final destination.
Things to watch for
Terminal Handling Charges (THC) at the destination
Containerised operations typically involve a number of stages between the points
where sellers deliver (and buyers collect) the containers and the container vessels.
Terminal operators typically make charges for these movements, but there is no
standard practice for how carriers treat these charges.
Incoterms 2010: A practical guide p. 16
In some instances the Terminal Handling Charges at the destination will be included
in the freight rate; but in other cases these charges will be for the account of the
buyer.
So to avoid nasty surprises when collecting goods, buyers should raise this question
with their exporters and should agree on the treatment of applicable THCs at the
destination.
Letters of credit
This rule, along with the other “C” rules (CIP, CFR, CIF) work well with letters of credit
and collections, because the seller controls the main transport, and so can be sure of
getting a transport document that evidences delivery.
NB the letter of credit may call for a transport document stating that the goods have
been “taken in charge” by the carrier OR “loaded on board” a vessel – the seller
should ensure that the carrier can supply the document with the required wording.
The other rules (EXW, FAS, FOB, FCA, DAT, DAP, DDP) all pose potential problems –
see the “Letters of credit and collections” section for more details.
Incoterms 2010: A practical guide p. 17
5.4 Carriage & Insurance Paid To CIP
This is one of four rules where the seller is responsible for arranging and paying for
transport to the named place, but where delivery and transfer of risk take place at an
earlier point before the main carriage.
For example, if the Incoterms rule for a consignment is CIP Pier T Long Beach,
California, an exporter in the UK may deliver a container to the carrier at Felixstowe
(UK), and contract with the carrier for transport to the named place (Long Beach).
The key point is that delivery and transfer of risk takes place before the main
carriage, when the container has been taken in charge by the carrier, and not at the
destination place named in the Incoterms rule.
So when this rule is used, the details of the journey, including the delivery point,
must be included in the commercial agreement – note that the Incoterms reference
will only mention the destination point.
This rule is appropriate for all modes of transport, and for multi-modal operations.
It is one of the rules of choice for containerised movements, which constitute the
vast majority of sea cargo operations.
The other major obligation of the seller is to obtain and pay for cargo insurance for
the journey to the named destination.
The insurance cover required by this rule is Institute Cargo Clauses C or equivalent,
which excludes various risks that the buyer may regard as necessary; so the exact
cover requirements should be discussed and included in the commercial agreement.
Things to watch for
Terminal Handling Charges (THC)
Containerised operations typically involve a number of stages between the points
where sellers deliver (and buyers collect) the containers and the container vessels.
Terminal operators typically make charges for these movements, but there is no
standard practice for how carriers treat these charges.
Incoterms 2010: A practical guide p. 18
In some instances the Terminal Handling Charges at the destination will be included
in the freight rate; but in other cases these charges will be for the account of the
buyer.
So to avoid nasty surprises when collecting goods, buyers should raise this question
with their exporters and should agree on the treatment of applicable THCs
Insurance
As noted earlier, the minimum level of cover mandated by this rule is Institute Cargo
Clauses C, which excludes war, strikes and some other risks that a buyer may regards
as necessary.
So the level of cover needs to be specified in the commercial agreement.
As the seller will be “off risk” for the main transport and beyond, the insurance
documents need to be made out in a form that will allow the buyer to claim under
the policy if necessary. It is also good practice for the buyer to establish a channel of
communication with the carrier beforehand, so that claims can be lodged promptly.
Letters of credit
This rule, along with the other “C” rules (CPT, CFR, CIF) work well with letters of credit
and collections, because the seller controls the main transport, and so can be sure of
getting a transport document that evidences delivery.
NB the letter of credit may call for a transport document stating that the goods have
been “taken in charge” by the carrier OR “loaded on board” a vessel – the seller
should ensure that the carrier can supply the document with the required wording.
The other rules (EXW, FAS, FOB, FCA, DAT, DAP, DDP) all pose potential problems –
see the “Letters of credit and collections” section for more details.
Incoterms 2010: A practical guide p. 19
5.5 The “arrival” rules DAT, DAP, DDP – general
considerations
For these three rules, the seller’s obligations now extend to delivering the goods to
the named place (usually) in the buyer’s country, and risk remains with the seller
until delivery has been completed.
This is an important difference from the “C” rules (CFR, CIF, CPT, CIP), where the
seller delivers the goods - and risk transfers to the buyer - before the main carriage.
• Delivered At Terminal. Delivery is completed when the goods have been
unloaded from the arriving vehicle at the defined place. Import clearance and
payment of all duties and taxes is the responsibility of the buyer
• Delivered At Place. Delivery is completed when the goods are available on the
arriving conveyance, ready for unloading by the buyer. Import clearance
payment of all duties and taxes is also the responsibility of the buyer.
• Delivered Duty Paid. Delivery is completed when the goods have been unloaded
from the arriving vehicle at the defined place. The seller is responsible for import
clearance and payment of all duty and taxes
The first two of these (Delivered At Place, Delivered At Terminal) often present an
issue of coordination of the actions of the seller-appointed carrier and the buyer.
In many instances, import clearance (responsibility of the buyer) must take place
before the seller has completed delivery of the goods to the named place.
So for the goods to proceed smoothly to their delivery point, it is necessary that
import clearance is done in a timely manner. The buyer – or buyer’s freight
forwarder - is responsible for this, but they are dependent on receiving accurate
information and complete documentation from the seller or the seller’s freight
forwarder.
Delays in import clearance can arise in a number of ways. The seller (or a party
acting for the seller) may provide incomplete information; information or documents
may arrive late; there may be inefficiency or lack of cooperation the part of the buyer
or the customs authorities. Whatever the cause, the effect will be late delivery
and/or penalties by way of storage charges or demurrage – and often a dispute
about who should pay these!
So when these rules are used, it is important that buyer and seller have a shared
understanding of the liaison that will be necessary. Ideally the commercial
agreement should also deal with responsibility for charges that may arise in the
event of delays in import clearance.
Incoterms 2010: A practical guide p. 20
(Note that these problems of coordination between delivery and clearance do not
arise if the goods can be delivered “uncleared” – for example, to a depot in a Free
Trade Zone.)
Here are some examples of how these “arrival” rules may work in practice.
1. China to UK, air transport
A UK manufacturer buys components from a supplier in China on a DAP basis.
The Chinese supplier employs a UK-based freight forwarder to arrange delivery to
the UK factory.
Upon arrival of the goods, the freight forwarder sends copies of the air waybill
and invoice to the buyer, who in return provides the freight forwarder with VAT
numbers and other information needed for import clearance. The freight
forwarder can now clear the goods for import on the buyer’s behalf. There is an
agreement with UK Customs that duty and handling fees for clearance are for the
buyer’s account.
It has been agreed that in the event of delays caused by failure of the buyer to
supply the required information, storage charges etc. will be the responsibility of
the buyer.
2. Turkey to Azerbaijan, road transport
Machine tools are transported from Turkey to Azerbaijan by road on a DAP basis.
The route involves travel through Georgia, but the transport document used by
the trucks allows entry to and exit from Georgia on an “in transit” basis.
On arrival at the Azerbaijan border, the buyer must clear the goods and pay the
duty without the opportunity to inspect the goods.
This arrangement poses a degree of risk for the seller – if the buyer fails to clear
the goods at the border promptly, there will be significant costs by way of drivers’
wages etc. In this case the seller’s solution is to require a deposit from the
buyer, which can be used to defray these costs if necessary.
Incoterms 2010: A practical guide p. 21
Delivered Duty Paid
In Delivered Duty Paid, the seller is responsible for import clearance and payment of
duties and tax, so liaison around clearance is less of an issue. However there are
other serious concerns for both parties – these will be explained below in section 5.8
on DDP.
Sellers should also be cautious in using any of the “D” rules for consignments to
“difficult” destinations, where their obligations to compete delivery may be
frustrated by poor transport infrastructure, bureaucratic delays and so on.
Conversely, the use of DAT and DAP should be more straightforward in these
situations:
• where delivery is to another country within a customs union such as the EU
• where the destination is within a Free Trade Zone - duty is not levied on arrival
Incoterms 2010: A practical guide p. 22
5.6 Delivered At Terminal DAT
This rule can be used for any transport mode, or where there is more than one
transport mode.
The seller is responsible for arranging carriage and for delivering the goods, unloaded
from the arriving conveyance, at the named place.
Risk transfers from seller to buyer when the goods have been unloaded.
‘Terminal’ can be any place – a quay, container yard, warehouse or transport hub. It
can also be the buyer’s premises, which is useful when “deliver-to-door” integrated
carriers are used.
The buyer is responsible for import clearance and any applicable local taxes or
import duties.
A useful rule, well suited to container operations where the seller bears
responsibility for the main carriage.
Things to watch for
Identification of the delivery point
Modern transport hubs can be very large, so it is essential that the delivery point be
specified in detail, e.g. an exact address, terminal number etc.
Liaison around import clearance
As noted in a previous section, there is a risk that failure of communication between
the seller (or sellers’ representatives) and the buyer can lead to delays in import
clearance, which will have consequences by way of demurrage, detention fees,
storage charges etc.
Incoterms 2010: A practical guide p. 23
Terminal Handling Charges THC
Carriers have different policies about whether freight charges include Terminal
Handling Charges at the destination. So if the delivery point is a port, these costs
should be identified, and agreement reached as to whether they are for the account
of the buyer or the seller.
Delivery to buyer’s premises
Where DAT (buyers’ premises) is used, the seller is reliant on the buyer’s prompt
cooperation in accepting the consignment and allowing unloading of the goods.
Where there are doubts about this, then DAP is preferable – delivery is complete
when the goods arrive still loaded on the vehicle.
Incoterms 2010: A practical guide p. 24
5.7 Delivered At Place DAP
This rule can be used for any transport mode, or where there is more than one
transport mode.
The seller is responsible for arranging carriage and for delivering the goods, ready for
unloading from the arriving conveyance, at the named place. (An important
difference from Delivered At Terminal DAT, where the seller is responsible for
unloading.)
So it is not suitable for scenarios where a rapid turn-around of a container ship or
aircraft is important.
Risk transfers from seller to buyer when the goods are available for unloading; so
unloading is at the buyer’s risk.
The buyer is responsible for import clearance and any applicable local taxes or
import duties.
Uses for this rule include where there are no storage facilities at the destination,
and/or where the buyer’s vehicle is needed for unloading.
The specified place can also be the buyer’s premises.
Things to watch for
Identification of delivery point
Modern transport hubs can be very large, so it is essential that the delivery point be
specified in detail, e.g. an exact address, terminal number etc.
Liaison around import clearance
As noted in an earlier section, there is a risk that failure of communication between
the seller (or sellers’ representatives) and the buyer can lead to delays in import
clearance, which will have consequences by way of demurrage, detention fees,
storage charges etc.
Incoterms 2010: A practical guide p. 25
Terminal Handling Charges THC
As delivery takes place upon arrival with the goods ready to be unloaded, it follows
that if the destination is the port of arrival, then Terminal Handling charges at the
destination should be for the buyer’s account.
Delivery to buyer’s premises
This rule works well for the seller. As delivery is completed upon arrival of the
vehicle, costs arising from delays in acceptance of the goods and unloading will be
the buyer’s responsibility
Incoterms 2010: A practical guide p. 26
5.8 Delivered Duty Paid DDP
This rule represents the extreme of responsibility for the seller, who must deliver the
goods to the specified place, having completed import clearance and paid any
applicable duties and taxes.
This is the only Incoterms rule that obliges the seller to undertake import clearance.
The rule can be used for any transport mode, or when more than one transport
mode is used
Delivery is complete when the goods arrive at named place, and are available for
unloading from the arriving vehicle.
This rule is sometimes demanded by buyers, but it can be highly problematical for
sellers. It also poses some risks for buyers – see below
Things to watch for
Can the seller undertake import clearance?
In some countries, import clearance can be complex and bureaucratic. A seller who
is not familiar with the process will encounter many frustrations and delays, so it is
best left to the buyer with local knowledge.
In many countries, import clearance can only be undertaken by entities with a
business presence in the country. By the same token, local taxes such as VAT may
only be payable by businesses registered with the local authorities.
(If necessary, the rule can be modified thus: Delivered Duty Paid (VAT unpaid)
Incoterms 2010: A practical guide p. 27
Risks for the importer
Importers may seek to isolate themselves from the import process by the use of this
rule. However there are now cases such as the following.
A consignment of goods imported from Asia into Australia was found to have
been misrepresented by the importer by use of an incorrect goods classification,
with a consequent underpayment of duty.
The authorities took the view that recovery of money from the supplier was
unlikely to be successful, so a judgement was obtained in which the importer
was held liable.
Incoterms 2010: A practical guide p. 28
5.9 Free Alongside Ship FAS
Use of this rule is restricted to goods transported by sea or inland waterway.
In practice it should be used for situations where the seller has direct access to the
vessel for loading, e.g. bulk cargos (oil, coal, grain etc.) or non-containerised goods.
For containerised goods, “Free Carrier FCA” should be used.
Seller delivers goods, cleared for export, alongside the vessel at a named port, at
which point risk transfers to the buyer.
The buyer is responsible for loading the goods and all costs thereafter.
The commonest uses of this rule are
• for ship chartering, where the buyer arranges for loading
• for large loads of machinery etc. which cannot be containerised
• at smaller ports where ships can load goods without the need for quayside
facilities
Things to watch for
The location of the delivery point must be described in as much detail as possible.
Berths and quayside storage are both scarce resources, so it is essential that the
seller and the buyer/carrier work closely together to coordinate the arrival of the
ship and the goods.
Goods security and letters of credit
One common use of this rule is for commodities transactions, which are often of high
value. As the goods are being delivered before loading onto the vessel, there is no
transport document that can be used by the seller to maintain control over the
goods.
This is turn limits the use of this rule with letters of credit and other secure-terms
payment methods. See Appendix A for more on this.
Incoterms 2010: A practical guide p. 29
5.10 Free On Board FOB
Use of this rule is restricted to goods transported by sea or inland waterway.
In practice it should be used for situations where the seller has direct access to the
vessel for loading, e.g. bulk cargos (oil, coal, grain etc.) or non-containerised goods.
For containerised goods, “Free Carrier FCA” should be used.
Seller delivers goods, cleared for export, loaded on board the vessel at the named
port.
Once the goods have been loaded on board, risk transfers to the buyer, who bears all
costs thereafter.
Things to watch for
Cargo operations after loading
For some types of cargo, other things will need to be done before the vessel can
depart.
• Stowing and lashing – locating the cargo appropriately within the vessel
(taking into account balance of the ship, other items loaded etc.) and securing
cargo to prevent its movement in rough seas.
• Dunnaging – stabilisation & protection of cargo by using packing material, air
bags etc.
The “Free on Board” rule makes no reference to these operations – the seller’s
responsibilities are fulfilled when the goods are “loaded on board”.
So if these are necessary for a specific consignment and are to be performed by the
seller, the rule can be qualified thus:
FOB stowed and lashed ….
Alternatively, assignation of these costs can be included in the commercial
agreement.
Incoterms 2010: A practical guide p. 30
Goods security and letters of credits
One common use of this rule is for commodities transactions, which are often of high
value.
As with the other Incoterms “F” rules, Free on Board is not ideal for use in letters of
credit transactions, because the buyer arranges the main transport and has the
business relationship with the carrier. An unscrupulous buyer can frustrate the
transaction by cancelling the transport arrangements. See Appendix A for a
detailed discussion and possible work-arounds.
Incoterms 2010: A practical guide p. 31
5.11 Cost & Freight CFR
Use of this rule is restricted to goods transported by sea or inland waterway.
In practice it should be used for situations where the seller has direct access to the
vessel for loading, e.g. bulk cargos (oil, coal, grain etc.) or non-containerised goods.
For containerised goods, consider ‘Carriage Paid To CPT’ instead.
Seller arranges and pays for transport to named port. Seller delivers goods, cleared
for export, loaded on board the vessel.
However risk transfers from seller to buyer once the goods have been loaded on
board, i.e. before the main carriage takes place. This is the point of delivery, as
defined by this rule.
NB seller is not responsible for insuring the goods for the main carriage. If they
buyer wants the seller to arrange insurance for the journey, “Cost Insurance and
Freight CIF” should be used.
As with the other “C” rules, this is a good choice where letters of credit are being
used. The seller contracts with the carrier for the transport, and so can be sure of
obtaining the transport document that will be needed to trigger payment by the
bank
Things to watch for
Specified destination
This should be as precise as possible, and should match the transport contract. Costs
arising beyond this point will be for the account of the buyer.
Transport document
This will usually be a bill of lading or a sea waybill, and must be provided by the
seller. It must indicate that the goods have been “loaded on board” and that freight
has been paid by the seller.
Incoterms 2010: A practical guide p. 32
Insurance
As the seller is not providing this, the buyer will normally arrange this for the
journey, as a matter of commercial prudence.
Incoterms 2010: A practical guide p. 33
5.12 Cost Insurance & Freight CIF
Use of this rule is restricted to goods transported by sea or inland waterway.
In practice it should be used for situations where the seller has direct access to the
vessel for loading, e.g. bulk cargos (oil, coal, grain etc.) or non-containerised goods.
For containerised goods, consider ‘Carriage and Insurance Paid CIP’ instead.
Seller arranges and pays for transport to named port. Seller delivers goods, cleared
for export, loaded on board the vessel.
However risk transfers from seller to buyer once the goods have been loaded on
board, i.e. before the main carriage takes place.
Seller also arranges and pays for insurance for the goods for carriage to the named
port.
However as with “Carriage and Insurance Paid To”, the rule only require a minimum
level of cover, which may be commercially unrealistic. Therefore the level of cover
will need to be addressed elsewhere in the commercial agreement.
As with the other “C” rules, this is a good choice where letters of credit are being
used. The seller contracts with the carrier for the transport, and so can be sure of
obtaining the transport document that will be needed to trigger payment by the
bank
Things to watch for
Specified destination
This should be as precise as possible, and should match the transport contract. Costs
arising beyond this point will be for the account of the buyer.
Incoterms 2010: A practical guide p. 34
Transport document
This will usually be a bill of lading or a sea waybill, and must be provided by the
seller. It must indicate that the goods have been “loaded on board” and that freight
has been paid by the seller.
Insurance
It should be borne in mind that although the seller arranges cargo insurance, the
seller is “off risk” once the goods have been loaded; so responsibility for making the
claim rests with the buyer. The insurance document must be made out accordingly,
e.g. endorsed in favour of the buyer.
Incoterms 2010: A practical guide p. 35
5.13 Qualifications of an Incoterms rule.
It is possible to add further wording to an Incoterms rule, in order to achieve a more
precise definition of obligations.
For example, with some types of cargo there are cost arising from operations such as
stowing the cargo on the vessel after loading. The Incoterms rule “FOB stowed” will
make it clear that the seller is responsible for these costs as well as those for loading.
Operations that may be required for the securing of cargo may include lashing and
dunnage – packing around the load to prevent movement in heavy seas.
Other examples:
• DDP, VAT unpaid – seller is responsible for paying import duty but not VAT
(which can often only be paid by a business entity in the country of arrival.)
• Ex Works, loaded – seller is responsible for loading onto the vehicle
Note:
Qualifications of the rules should be used with
caution, as they may be open to different
interpretations should problems arise.
For example with “Ex Works loaded”, there have
been disputes as to whether loading is at the
buyer’s or the seller’s risk!
Incoterms 2010: A practical guide p. 36
6 The US perspective
The Incoterms 2010 revision is of particular interest to companies in the United
States (and their trading partners) for the following reasons.
6.1 Incoterms rules vs the Uniform Commercial Code
Trade practitioners in the U.S. will be aware that the terms FOB, CIF and so on are
defined within the United States federal Uniform Commercial Code (UCC).
First published in 1952, UCC covers many aspects of commercial contracts. It
contains “shipment and delivery” provisions that have similar aims to those of the
Incoterms rules.
Some UCC expressions have the same three-letter abbreviations as those within the
Incoterms system; but their definitions are totally different. Notoriously, “FOB” can
have several different meanings within UCC, most of which do not correspond with
the ICC Incoterms FOB definition.
The situation is confused further by variations between different US states. In 2004,
there was a major revision of the UCC, which abolished many of these terms.
However for reasons unrelated to its “shipment and delivery” provisions, many
states have failed to adopt the 2004 revision; so in these states, the former UCC
revision remains law.
Companies in the US are therefore faced with the prospect of mastering two versions
of the UCC for use with domestic transactions, plus ICC Incoterms rules for use with
cross-border transactions.
The logical solution to this confusion is to standardise on the use of ICC Incoterms
rules for all transactions, whether domestic or international.
The Incoterms 2010 revision has been drafted to make the interpretation of the rules
very straightforward for domestic trades.
For example, all obligations in respect of import or export procedures need only be
considered ‘where applicable.’
Incoterms 2010: A practical guide p. 37
6.2 Ex Works, EAR and routed transactions
The Ex Works rule places the burden of export clearance on the buyer, not the seller.
However US exporters who are attracted by this opportunity to avoid work should be
aware of US Export Administration Regulations.
These make it clear that any infringement of regulations or defects in the
information filed remain the responsibility of the exporter as US Principal Party of
Interest (USPPI.)
Furthermore, transactions in which transport arrangements are made by the
overseas buyer and not the seller will be defined as “routed” transactions, and will
be subject to extra scrutiny.
The use of Ex Works therefore creates significant compliance risk for the exporter.
Ideally the seller should control the transportation by using a rule such as CIP or CPT.
But if this is not possible, then it is better to undertake export clearance oneself and
use Free Carrier (seller’s premises.)
Incoterms 2010: A practical guide p. 38
Appendix A: Letters of credit and collections
I. What are letters of credit and collections?
These are sometimes referred to as “secure terms” settlement methods. Their
common feature is that buyer and seller operate in a situation of limited trust.
The seller may be concerned that the buyer will be unable to pay for the goods –
either due to their own financial difficulties or because of country-related issues such
as political instability and shortage of foreign exchange. The buyer may be
concerned that the supplier may fail to deliver the goods as per the agreement.
• Documentary letter of credit.
A payment undertaken given by a bank to a seller on behalf of a buyer, given
before the goods are despatched. The bank undertakes to pay the seller upon
presentation of documents representing the goods to be supplied. These
documents will include a transport document as evidence of delivery of goods to
the carrier (or loading of goods on board the vessel.)
• Documentary collection
.
Documents representing the goods are presented to the buyer through the
banking system. If they are in order, the buyer pays the seller (or if credit terms
have been extended, accepts a term draft, committing itself to pay at a future
date.)
Less secure that a letter of credit, because there is no prior payment undertaking
from a bank. Nonetheless with some transport modes this can allow the seller to
retain control of the goods until the buyer has paid or agreed to pay.
Typical uses are where the seller can readily find other buyers for the goods if
necessary; or where the buyer is financially secure, but where an incentive for
prompt payment is needed.
Incoterms 2010: A practical guide p. 39
The security offered by a letter of credit
The documentary letter of credit works for the seller, because a bank backs the
transaction with its reputation and financial resources. Provided that the seller
presents documents that comply with its terms and conditions, the bank will pay the
amount due, even if:
• the buyer is in financial difficulties and cannot pay
• for a confirmed letter of credit, there are economic or political factors that
interfere with payment
The buyer is protected because the bank will only pay if the documents meet all the
terms and conditions that the buyer has set out in the letter of credit. So the
transport document will need to show despatch of the goods no later than the date
that the buyer has specified in the credit, specified places of despatch and delivery
and so on.
Buyers who have concerns about the quality or specification of the goods can require
presentation of a certificate of inspection issued by an independent company.
NB letters of credit are sometimes required for purely administrative reasons, e.g. as
part of a country’s regime of import control or foreign exchange management. In
such cases the following cautions on the choice of Incoterms rule may not apply.
Incoterms 2010: A practical guide p. 40
II. How the Incoterms rules work with letters of credit
The “C” rules – CPT, CIP, CFR, CIF – work well with letters of credit; however all the
other rules may present problems for either the buyer or the seller.
For the “C” rules, the seller is responsible for arranging the main transport, and so
has the business relationship with the carrier. Let’s look at the example of a
container being sent by sea using CIP.
The sequence of events is as follows:
1. The seller delivers the container to the carrier at the container terminal. The
seller is given a bill of lading, which is marked “taken in charge” by the carrier.
2. The seller presents this to the bank, along with the other documents required by
the letter of credit. Provided the documents all comply with the terms of the
letter of credit, the bank pays the seller.
3. All documents, including the bill of lading, are given to the buyer, so the goods
can be claimed at their destination.
LETTER OF CREDIT UTILISATION PROCESS
Now consider the same scenario with the corresponding “F” rule – for a container,
this will be Free Carrier FCA.
With this rule, it is the buyer who is responsible for the main transport, and who has
the business relationship with the carrier. An unscrupulous buyer may be able to
frustrate the contract by cancelling the shipping arrangements or interfering with
delivery of the bill of lading to the seller. Without the bill of lading, the seller cannot
make a valid presentation and so cannot get paid.
Incoterms 2010: A practical guide p. 41
With Ex Works EXW, the position is even more problematical. Under this rule,
“delivery” is a matter arranged between seller and buyer. There is no carrier who
can serve as neutral intermediary, and therefore no document that can serve as
evidence of delivery for the purposes of the letter of credit.
Now let us consider a scenario using a “D” rule, Delivered at Place. Suppose that the
final destination is the buyer’s premises, so the seller must arrange sea transport,
followed by transport by truck to the specified location. Under this rule, “delivery”
is defined as arrival at the final destination.
What document can the letter of credit call for as evidence of completion of the
seller’s obligations?
For sea transport, the usual document called for by a letter of credit is a bill of lading
showing the goods taken in charge (or in some cases, loaded on board the ship)
before the main transport.
This will suit the seller, who can present the bill of lading and get paid before the
goods arrive at their destination. But it is not ideal for the buyer, who must now
trust the seller to complete their obligation to deliver to the buyer’s premises, as set
out in the DAP rule.
(In principle the letter of credit could call for a delivery note issued by the buyer
upon arrival of the goods. But there is nothing to prevent an unscrupulous buyer
from refusing to take delivery and/or provide this document.)
III. Practical steps with the “F” rules
If it is necessary to use one of the “F” rules in conjunction with a letter of credit, and
if the seller is concerned about the reliability of the buyer, then there is a potential
work-around, which is based upon specifying within the letter of credit an alternative
set of documents, that can be substituted by the seller in the event that a bill of
lading cannot be provided.
The typical set of documents specified for this contingency will be along the lines of:
• Forwarders’ certificate of receipt as evidence that the goods called for by the
letter of credit have been taken in charge
• Copy of beneficiary’s notice of cargo readiness sent to applicant
• Beneficiary’s certificate attesting that the agreed transport arrangements are not
available (e.g. non-arrival of vessel)
Incoterms 2010: A practical guide p. 42
IV. Letters of credit in practice - things to watch for
The letter of credit process starts with the buyer and seller agreeing on the details of
transaction, which will include the product and its price, the transport method and
shipment date etc., the Incoterms rule that will apply. The latter will determine
what documents the letter of credit will call for. For example, if this is Carriage and
Insurance Paid, there will need to be a transport document and an insurance
document.
The details of the transaction will be incorporated into the buyer’s application for the
letter of credit, which will serve as the basis for the letter of credit instrument that
the seller will be advised of through the banking system.
The experience of banks and trading companies is that producing a set of documents
that comply with all the terms and conditions of a letter of credit is not
straightforward. Industry statistics show at as many of 50% of presentations by
exporters to their banks are rejected in the first instance due to discrepancies, often
about very trivial matters.
It is therefore good practice for the seller to ask to see the buyer’s application for the
letter of credit at an early stage, before it is submitted to the bank. The seller will
need to check that this reflects the commercial agreement, and that it will be
possible to produce documents that will match all the credit’s terms and conditions.
Specifically, the seller will need to check the following:
• Do the journey stages on the letter of credit (e.g. place of receipt/taking in charge
by the carrier, port of loading, port of unloading, place of final destination) match
the agreed route for the consignment? Note that for multi-modal transport
there can be up to four pieces of information to consider – when and where
goods were taken in charge; when and where goods were loaded onto a vessel;
when and where good were unloaded from vessel; when and where goods finally
delivered.
• Can the latest date of shipment be complied with?
• Can the carrier provide the required transport document with the required
wording, e.g. a date of taking in charge or a date of loading on board, as
specified?
There are many other aspects of the transport document that may need to be
considered in relation to the wording on the letter of credit.
Incoterms 2010: A practical guide p. 43
Successful letter of credit transactions require detailed knowledge of two ICC
publications
• UCP 600: ICC Uniform Customs and Practice for Documentary Credits 2007
revision. ICC Publication No. 600
The rules for drafting of letters of credit and for examining documents for
compliance
• ISBP International Standard Banking Practice for the Examination of Documents
under Documentary Credits. 2013 edition. ICC Publication No. 745
A supplementary guide for the examination process and interpretation of the
rules
See Appendix V for a checklist for checking the transport document against the letter
of credit, to be used in conjunction with the above publications.
Journey points, letter of credit for multi-modal transport
Incoterms 2010: A practical guide p. 44
The letter of credit documents – the devil is in the detail.
Anybody who has worked with letters of credit will know the frustration of having
documents rejected by the bank due to apparently trivial discrepancies between the
requirements of the letter of credit and the documents that have been presented.
Not surprisingly, the Incoterms rules provide their own opportunities for error!
The SWIFT MT700 Letter of Credit message format does not have a separate field for
the Incoterms rule. If specified on the credit, the rule will usually appear as part of
“Description of Goods and Services”.
However there will be implications for documentary requirements, e.g. transport
document and insurance document.
Where a rule such as CIP is used, the buyer will want to be sure that the seller has
indeed paid for carriage to the agreed place, so the documents section of the credit
will include wording such as “Bill of lading marked …. freight paid to Long Beach,
California”.
Consider a transport document that is annotated with two separate statements:
1. Freight paid
2. CIP Long Beach, California
Does this transport document signify that freight was paid to Long Beach?
Common sense would suggest that it does – after all, CIP is well known to mean that
the seller pays for carriage to the named place.
However in the real world of letters of credit, documents such as these are
sometimes rejected, using arguments along the lines that it is not the role of the
examiner to understand terms such as CIP and apply this understanding to the case!
Incoterms 2010: A practical guide p. 45
V. Checklist for the transport document
(To be used in conjunction with UCP 600 and ISBP)
• The document is a transport document as defined by UCP (e.g. not a freight
forwarder’s certificate etc.)
• Transport document appropriately signed, with capacity of signatory if
necessary
• If a charter party bill of lading presented, credit must allow this
• Transport document must be clean, not claused (no damage or defects noted)
• Consignee details as per the credit
• Bill of lading consigned correctly, e.g. to order and endorsed as required
• Places of receipt/loading/unloading/delivery correct
• Showing “shipped on board “ and not on deck
• Name of vessel correct
• Showing shipped on or before latest shipment date
• Transhipment only if permitted by credit
• Marked freight paid if required
• Goods description consistent with credit
Incoterms 2010: A practical guide p. 46
Appendix B: Freight insurance and the rules
The general approach of the Incoterms 2010 rules is that only two of the rules,
Carriage and Insurance Paid to (CIP) and Cost Insurance and Freight (CIF) impose any
obligation on any party to arrange freight insurance.
In all other cases, parties are free to make their own decisions as to the need for
freight insurance for those portions of the journey where they have responsibility for
the goods.
(Buyers and sellers should bear in mind that although carriers may have insurance
cover for consignments in their care, the various international conventions on the
transport of goods set limits on carriers’ liabilities which are typically well below the
commercial value of cargos.)
As noted in the detailed coverage of CIP and CIF:
• The level of cover mandated by these two rules is minimal, and corresponds
to Institute Cargo Clauses C. Important risks such as war and strikes are not
covered; therefore the appropriate level of cover needs to be discussed and
incorporated into the commercial agreement
• Although the seller procures the insurance, the seller will be “off risk” before
the main transport, and hence it will be the responsibility of the buyer to
make a claim. The insurance documents need to be made out appropriately,
e.g. endorsed in favour of the buyer; and the buyer should establish a line of
communication with the carrier and/or insurer in case a claim needs to be
made.
Warning to sellers
Your customer’s insurance arrangements may be of more than
theoretical interest!
Consider a consignment shipped using CFR or CPT – the seller is
not required to insure the goods, and the buyer fails to do this.
If the goods are damaged and the sale is on open account terms,
an unscrupulous buyer may choose to walk away from the
transaction
A cautious seller may feel it necessary to see evidence that the
buyer has taken out insurance, with the seller named as
beneficiary.
Incoterms 2010: A practical guide p. 47
Whilst this arrangement may appear to suit the seller very well, some sales
departments are uncomfortable with it from a “customer service”
perspective, and would prefer to take responsibility for handling insurance
claims.
If the seller wishes to offer this facility, it can be achieved with a letter of
subrogation, in which the buyer relinquishes rights under the insurance policy
in favour of the seller.
Incoterms 2010: A practical guide p. 48
Comments
Resolve references to Appendix??
Something on transport documents generally, e.g. the types, and who provides what.
Check on font size consistency for body text
Things to watch for – another hierarchy level or different font size
String sales catered for, e,g. the seller does not need to ship the goods, they can
procure a contract of carriage by taking over an existing one.