COMPARATIVE STUDY OF VARIOUS
     INTERNATIONAL COMMERCIAL TERMS
          (INCOTERMS) USED IN THE
         SALE - PURCHAS...
From the warehouse to the destination of the delivery, there        Using the checkpoints above, it is easier to understan...
B. II. FAS (Free Alongside Ship)                                     Accordingly to the INCOTERMS 2000, the Seller had
   ...
C. II. CIF (Cost Insurance & Freight)                              D. Group – D

The CIF (Cost Insurance & Freight) is add...
D. III. DEQ (Delivered Ex-Quay)                                    associated with them to either Seller or the Buyer:

Th...
their banker and freight forwarder to agree on the most              In the case of dispute and conflict between the parti...
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COMPARATIVE STUDY OF VARIOUS INCOTERMS USED IN SALE-PURCHASE CONTRACTS [MAY 2010]

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INCOTERMS (International Commercial Terms) are the Trade terms, published by the International Chamber of Commerce (ICC). These terms are commonly used in international contracts and are of the principle to lay down the rules to characterize the role and the compulsions (both financial and legal responsibilities) between the Sellers and the Buyers, involved in an international commercial transaction involving carriage of merchandise, globally from one place to another. The paper discusses the proportional responsibilities and liable obligations on the Seller and the Buyer under INCOTERMS groups and statements, and how effective the terms can play their role on making the trade communication of legalities easier.

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Transcript of "COMPARATIVE STUDY OF VARIOUS INCOTERMS USED IN SALE-PURCHASE CONTRACTS [MAY 2010]"

  1. 1. COMPARATIVE STUDY OF VARIOUS INTERNATIONAL COMMERCIAL TERMS (INCOTERMS) USED IN THE SALE - PURCHASE CONTRACTS Fahad Mahmud Mirza Abstract – INCOTERMS (International Commercial Terms) are became a consistent stamp and a constant risk in international the Trade terms, published by the International Chamber of trading and shipping. For that reason, in order to encourage Commerce (ICC). These terms are commonly used in consistency and eliminate confusion, the International international contracts and are of the principle to lay down the Chamber of Commerce (ICC) in 1936 developed one standard rules to characterize the role and the compulsions (both financial and homogeneous set of IN-(International)-CO-(Commercial)- and legal responsibilities) between the Sellers and the Buyers, involved in an international commercial transaction involving TERMS for the traders worldwide to accept and practice. carriage of merchandise, globally from one place to another. The Since then, these INCOTERMS have played a key role in paper discusses the proportional responsibilities and liable global business of exchange, and they specifically address obligations on the Seller and the Buyer under INCOTERMS certain key responsibilities and compulsions, helping institute groups and statements, and how effective the terms can play momentous and considerable “markers” along the chain of the their role on making the trade communication of legalities easier. micro-logistics mechanism [2]. I. INTRODUCTION There basic use is to define the relationship between the buyer and the seller, regarding the mode of delivery and to justify The economic market and trade traffic of this century beyond the member who is supposed to organize for customer doubt consists of single universal market. The Buyers and clearances and licenses. Along with the passage of title, these Sellers most of the times find themselves on different terms are used to illuminate as either who has to obtain continents in different parts of the world, they communicate insurance of the goods and merchandise during the transport, by having a uniform and homogeneous set of trading, chiefly generally known as the transfer of risks and insurance known as International Commercial Terms (INCOTERMS) to responsibilities. From the delivery terms to the justified help understand and route properly through international delivery achievement and how the costs will be allocated transactions and also clarify each of the Buyer’s and Seller’s among the parties are all covered in these sets INCOTERMS role in this supply chain of trade and transactions. [1]. INCOTERMS are a series of various international sales terms, II. INCOTERMS GROUPS AND UTILITIES which were first, published by International Chamber of Commerce (ICC) back in 1936, and then in the present dates There are a total of 13 International Commercial Terms of 2000, 2009 and now 2010. In the early 1900’s, many of the (INCOTERMS), which are categorized to four major groups international traders, who were situated in diverse regions of in order of their utility and comprehension [3]: the world, devised a set of short abbreviations used for certain frequently practiced trading terms. On the other hand, due to (i) Group – E (Origins Group) disparity in culture, associations, language and syntax, (ii) Group – F (Carriage NOT PAID by the Seller) knowledge and experience, translations and linguistics, these (iii) Group – C (Carriage PAID by the Seller) trading terms had dissimilar meanings for these diverse global (iv) Group – D (Arrival at the Stated Destination) members of trade. The rise in confusion and common errors
  2. 2. From the warehouse to the destination of the delivery, there Using the checkpoints above, it is easier to understand now are almost 12 milestones or checkpoints in the transport that the Seller is responsible from Checkpoint – 1 to pattern [6]. For the comprehension of the merchandise Checkpoint – 3, and the Buyer is responsible from transport track, the milestones (in order of the precedence) are: Checkpoint – 4 to Checkpoint – 12. In some practices, it is common that the Seller loads the goods on truck or the (1) Warehouse storage at origin container without charging the loading fees; Checkpoint – 4.  (2) Warehouse labor at origin  (3) Export packing B. Group – F  (4) Loading at origin The letter “F” is short for the word Free, and this group  (5) Inland freight includes terms mentioned here in order of precedence and  (6) Port receiving charges responsibilities on Seller,  (7) Forwarders fee  (8) Loading on ocean carrier (i) FCA (Free Carrier)  (9) Ocean/Air freight chargers (ii) FAS (Free Alongside Ship)  (10) Chargers at foreign shipping-port or the airport (ii) FOB (Free On-Board)  (11) Customs, taxes and duties abroad, and finally  (12) Delivery charges to final destination The fundamental characteristics of this group are that Buyer and Seller have agreed that the Seller is generally responsible We may use these checkpoints to analyze the maximum level to deliver the commodities or goods to a carrier or location of responsibilities for Buyer and Seller in the respective designated by the Buyer. Again, once the Seller has groups, to make the understanding and comprehension of the effectuated the delivery to the specified location by the Buyer, responsibilities much easier. These terms re applicable for the Seller’s responsibilities tend to cease and the Buyer’s tangible goods only, are only valid if they have been agreed obligations tend to begin. upon on clearly contractual terms, and have been named in purchase agreements, general purchase and sale conditions, B. I. FCA (Free Carrier) orders, order confirmations etc., or included in a separate agreement. The FCA (Free Carrier) is added with the name of point of departure or loading with it, for example, FCA Lahore. A. Group – E Generally, under this term, the delivery of goods is conducted on a truck, a rail-car or container at the specified point of The letter “E” is short for Ex-Works (Ex means “from” and departure, which are usually the Seller's own premises, or a Works means “factory or warehouse”), where a named place designated train station or even a named cargo terminal or into for shipment is available to the Buyer, not the Seller. And the the custody of the carrier, all at the Seller's expense. Asides, Seller will not contract for any transportation. The the point at origin may or may not be a customs clearance abbreviation for this group is EXW and an added location center. Buyer is responsible for the main carriage or freight, name is tagged with it, for example, EXW Qasim Port. the freight insurance and other costs and risks associated. The key characteristic of this group is that the Seller Some manufacturers also use the terms FOT (Free On-Truck) represents to make the goods available at his own property, or and FOR (Free On-Rail). his site, to the Buyer. Once the Buyer picks up the goods, the Seller’s duties and obligations are completed and fulfilled. The FCA term is further divided in to two types; one is the Obviously, this group forces the condition where the Seller FCA Seller’s Premises, where the Seller is responsible only has very few obligations and has an extremely low level risk for loading the goods and not responsible for inland freight. of losses and the title is transferred almost instantaneously in This carries the responsibilities of Seller from Checkpoint – 1 the supply-chain network. Almost from the beginning, it is to Checkpoint – 4 only, and the Buyer has obligations from the Buyer who ultimately bears the risk of losses and has to Checkpoint – 5 to Checkpoint – 12. The second FCA term is cover and tolerate with all the hazards and hurdles of the FCA Named Place (International Carrier) where the Seller is complete transport. Some manufacturers also use the term Ex- responsible for the Inland Freight. This carries the Factory, which is as same as Ex-Works. responsibilities of Seller from Checkpoint – 1 to Checkpoint – 5, and the Buyer’s obligations from Checkpoint – 6 to Checkpoint – 12.
  3. 3. B. II. FAS (Free Alongside Ship) Accordingly to the INCOTERMS 2000, the Seller had responsibilities from Checkpoint – 1 to Checkpoint – 6, and The FAS (Free Alongside Ship) is added with the named port also for Checkpoint – 8: Loading on the Ocean Carrier, and of origin, for example, FAS Karachi. This term is popular for the Buyer had responsibilities of Checkpoint – 7: Forwarders the ‘break-bulk shipments’ and with the importing countries fee and then from Checkpoint – 9 to Checkpoint – 12. Then in using their own vessels. The FAS term requires the Seller to INCOTERMS 2010, the Seller now has responsibilities from clear the goods for export, which is a turnaround or a reversal Checkpoint – 1 to Checkpoint – 8, including the Checkpoint – from previous practices mentioned here. Goods are placed in 7: Forwarder’s fee and the Buyer’s obligations start from the dock shack or at the side of the ship, on the dock or lighter, Checkpoint – 9 to Checkpoint – 12. within the reach of its loading equipment so that they can be loaded aboard the ship, all at the Seller's expense. Buyer is C. Group – C responsible for the loading fee, main freight and shipment charges, cargo and goods insurance, and all other costs and The letter “C” is short for the word Cost, and this group concerning risks associated. includes terms here in order of precedence and responsibilities on Seller, Accordingly to the INCOTERMS 2000, the Seller was (i) CFR (Cost & Freight) responsible from the Checkpoint – 1 to Checkpoint – 6, the (ii) CIF (Cost Insurance & Freight) Port Receiving Charges, or Terminal Charges [5]. Recently, in (iii) CPT (Carriage Paid To…) INCOTERMS 2010, the Seller is responsible from the (iv) CIP (Carriage & Insurance Paid To…) Checkpoint – 1 to Checkpoint – 7, up till the forwarder’s fee, which was the obligation for the buyer in INCOTERMS 2010 The essential characteristics of this grouping are that the Seller [6]. Now the Buyer has obligations from Checkpoint – 8 to is obligated for contracting and paying for the carrying and Checkpoint – 12. The Delivery is accomplished once the moving of goods but has no obligation to bear with additional goods are handed over to the Buyer’s Forwarder for insurance costs nor has to bear with any sort of risk associated to losses, and transportation. once the goods have been shipped. B. III. FOB (Free On-Board) C. I. CFR (Cost & Freight) The FOB (Free On-Board) is added with the named port of The CFR (Cost & Freight) is added with the named port of origin, the loading container or vessel, at the Seller’s expense, destination, at the Seller’s expense, for example CFR Karachi. for example FOB Singapore. Under the rules of INCOTERMS Under the rules of INCOTERMS 1990, the term is chiefly 1990 onwards, the FOB term is specifically used for ocean used for ocean freights only. But still, many practice this term and in-land waterway transportation of goods and products, for air cargo trade as well. and the Seller uses his freight forwarder to move the commodities to the port of designated port of origin. This term refers towards two distinct and separate responsibilities; first one is dealing with the actual cost of Although the rule is set that FOB be used for waterways merchandise; C, and the other one refers to the freight charges always and only, many importers and exporters still use the to a predetermined destination point; F. It is the Seller’s prime FOB term in case of air freights as well. North American responsibility under this term to acquire the goods from their exporters and importers have developed some new functions, door to the port of target, and delivery is completed at this such as dealing on the open account and consignment basis, time. It is then the Buyer's responsibility to cover insurance using the shipping terms FOB Origin and FOB Destination from the port of origin or port of shipment till his very own [4]. The term FOB Origin coins that the Buyer is responsible door. Provided that the Seller is responsible for transportation, for the freight and other costs plus risks. And the FOB the Seller also chooses the forwarder under the rules. Destination defines that the Seller is accountable for freight and other costs and risks. These terms are not the part of In this term of CFR, the Seller has responsibilities from INCOTERMS and should always be avoided in international Checkpoint – 1 to Checkpoint – 9, and the Buyer has trades. obligations from Checkpoint – 10 to Checkpoint – 12.
  4. 4. C. II. CIF (Cost Insurance & Freight) D. Group – D The CIF (Cost Insurance & Freight) is added with the named The letter “D” is short for the word Delivery/Delivered, and port of destination at the Seller’s expense, for example, CIF this group includes terms mentioned here in order of Dubai. Under the rules of INCOTERMS 1990, the term is precedence and responsibilities on Seller; primarily dedicated for the use of ocean freight and trade, but (i) DAF (Delivery-At-Frontier) as of like other terms, this term is also used for air freight (ii) DES (Delivered Ex-Ship) purposes by many traders under the old mind-set. This term is (iii) DEQ (Delivered Ex-Quay) arranged similar to the CFR as previously discussed, but (iv) DDU (Delivered Duty Unpaid) instead of the Buyer insuring the products for the marine (v) DDP (Delivered Duty Paid) phase of the voyage, the Seller will assure the goods and products. With this understanding and agreement, the Seller This grouping is exactly the opposite of the Group – E. In usually chooses his own forwarder, and the delivery is other words, the Seller has all the obligations of costs, risks, accomplished at the port of destination. insurance, duties etc. and must make the merchandise available at the named place of destination, which is usually In this term of CIF, the Seller has responsibilities from named by the Buyer and may also be the Buyer’s factory. Checkpoint – 1 to Checkpoint – 9, and the Buyer has his obligations started from Checkpoint – 10 to Checkpoint – 12. D. I. DAF (Delivery-At-Frontier) C. III. CPT (Carriage Paid To…) The DAF (Delivery-At-Frontier) is added with the specified named point at the border, all at the Seller’s expense, for The CPT (Carriage Paid To…) is added with named place of example DAF Hong Kong. In this term, the Seller's destination (discharge) at the Seller’s expense, for example responsibility is to employ a forwarder to take goods to a CPT Manhattan. In CPT transactions, the Seller has the same named border line, which is usually a border-crossing point, obligations found with the term CIF, in addition that the Seller and clear them for export and the delivery occurs at that very has to buy freight insurance, naming the Buyer as the insured time. The Buyer's responsibility is to arrange with their while the goods are in transit. forwarder for the pickup of the goods after they are cleared for export, carry them across the border, clear them for The term of CPT is configured to adjust responsibilities of importation and cause the delivery. In most cases, the buyer's Seller from Checkpoint – 1 to the Checkpoint – 10, and the forwarder handles the task of accepting the goods at the border Buyer has obligations from Checkpoint – 11 to Checkpoint – across the foreign soil. 12. In this term, the Seller has his responsibilities from C. IV. CIP (Carriage & Insurance Paid To…) Checkpoint – 1 to Checkpoint – 10, and the Buyer has obligations from Checkpoint – 11 and Checkpoint – 12. The CIP (Carriage & Insurance Paid To…) is added with the named place of destination at the Seller’s expense, for D.II. DES (Delivered Ex-Ship) example CIP Los Angeles. This term is primarily used for multi-mode transport, because it relies on the carrier's The DES (Delivered Ex-Ship) is added with the named port of insurance. The Seller is only required to purchase minimum destination at the Seller’s expense, for example DES Osaka. In coverage. When this particular agreement is in sight, the this type of transaction, it is the Seller's responsibility to get freight forwarders often act in consequence, as the carriers. the goods to the port of destination or to engage the forwarder The Buyer's insurance is effectual when the goods are turned to the move cargo to the port of the destination unclear. Any over to the Forwarder. destination charges that occur after the ship is docked are the Buyer's responsibility. The term of CIP covers the responsibilities of Seller from Checkpoint – 1 to the Checkpoint – 10, and the Buyer has In this term, the Seller has responsibilities from Checkpoint – obligations from Checkpoint – 11 to Checkpoint – 12. The 1 to Checkpoint – 9, and the Buyer has responsibilities from Buyer has responsibilities for customs, duties and taxes and all Checkpoint – 10 to Checkpoint – 12. the delivery charges at the final destination.
  5. 5. D. III. DEQ (Delivered Ex-Quay) associated with them to either Seller or the Buyer: The DEQ (Delivered Ex-Quay) is added with the named port (i) Cash in Advance (No Risk to Seller) of destination at the Seller’s expense, for example DEQ (ii) Letter of Credit (L/C) Bangkok. In this type of transaction, the Buyer is responsible (iii) Drafts for duties and charges, and the Seller is responsible for (iv) Open Account (No Risk to Buyer) delivering the goods to the quay (dock), wharf (landing stage) Whenever International Terms of Payment are established, it or port of destination. In a reversal of DES practice, the Buyer is necessary to consult the personal financial advisor or the has to arrange for customs clearance also. banker and shipper to determine and analyze the best, suitable option with benefits. In this transaction, the Seller has responsibilities from Checkpoint – 1 to Checkpoint – 10, and the Buyer has A. Cash in Advance obligations from Checkpoint – 11 to Checkpoint – 12. The Buyer pays the cash before the shipment is made, and D. IV. DDU (Delivered Duty Unpaid) goods are available to the Buyer after the payment. In this mode of payment, there is no risk associated to the Seller, but The DDU (Delivered Duty Unpaid) is added with the named complete set of risks associated with the Buyer, because he point of destination, often the project site or the Buyer’s relies on the Seller that the goods are shipped as exactly premises, at the Seller’s expense, for example DDU expected, ordered and quoted. Vancouver. In this INCOTERM, the Seller is responsible for most of the expenses, which include the cargo insurance, B. Letter of Credit (L/C) import customs clearance, and payment of customs duties and taxes at the buyer's end. The seller may opt not to insure the Letters of Credit require total accuracy in conforming to goods at his own risks. terms, conditions, and documentation. There is a Confirmed and Unconfirmed Irrevocable Credit, types of L/C. In the In this term, the Seller has responsibilities from Checkpoint – Confirmed Irrevocable Credit, the payment is made after the 1 to Checkpoint – 10 and also for Checkpoint – 12: Delivery shipment and the documents are then presented to the bank. Charges to Final Destination. The Buyer has only the The Seller must take serious note that the Commercial Invoice responsibility for Checkpoint – 11: Customs, Duties and must match the L/C exactly; the dates must be carefully Taxes Abroad. headed and, as it is mentioned in legal language, the "Stale" documents are intolerable for collection. The Confirmed D. V. DDP (Delivered Duty Paid) Irrevocable Credit provides the seller a double assurance of payments, and he also depends on the terms of the letter of The DDP (Delivery Duty Paid) is added with the named point credit. This type assures the Buyer that the shipment is made, of destination, which is again the project site or Buyer’s but he relies on exporter to ship goods as described in premises, for example DDP Bujumbura. The DDP terms tend documents. The Decision Terms can be negotiated and to be used in intermodal or courier-type shipments. The Seller acknowledged prior to making an L/C agreement, mitigating is responsible for dealing with all the tasks involved in moving the Buyer's degree of risk. In the case of Unconfirmed goods from the manufacturing plant to the Buyer’s door. It is Irrevocable Credit, the Seller has a single bank assurance of the Seller's responsibility to insure the goods and absorb all payment and remains dependent on overseas bank. It is costs and risks including the payment of duty and fees. recommended that the Seller should contact his banker to resolve whether the issuing bank has adequate assets, as much In this term of transaction, the Seller has all the enough to cover the amount. responsibilities from Checkpoint – 1 to Checkpoint – 12. C. Drafts III. INTERNATIONAL TERMS OF PAYMENT A draft may perhaps be written with practically any term or There are four basic International Terms of Payment, based on condition agreeable to both the parties involved in the methods of payment, the time of payment and the risks merchandise. When determining the draft’s terms and conditions, it is necessary for both the parties to consult with
  6. 6. their banker and freight forwarder to agree on the most In the case of dispute and conflict between the parties, the advantageous means of doing trade in a specified country. A conventional courts always consider Sales Contract initially, if draft can be a collection tool used to barter possession and title there is any available, and after that they consider the Course to merchandise for payment. Seller is fundamentally drawing of Performance, the Course of Dealing and then the Industry a check against the bank account of the Buyer. And it is Standards applicable. Some additional factors are also necessary that the Buyer's bank must have a pre-approval, or generally considered that either which person has the must seek approval of the Buyer prior to honoring the check. possession, whether the payment has been made or not and There are two kinds of drafts; Sight Drafts and Time Drafts. In which INCOTERMS, among the set, have been utilized for Sight Drafts, the payment is made to the Seller once the draft trade. It is clear that INCOTERMS are not the contract and are is presented to Buyer, and the Buyer receives his goods once not the legal definition and will never, on their own, define the he pays at the bank. For the Seller, if the draft is not intent of the parties. They neither define the contractual rights, privileged, then the goods must be returned or resold and the nor the liabilities and/or obligations between the parties. storage, handling, and arrival freight expenses may also be acquired. The Time Drafts are characterized so as that the V. CONCLUSION payment is made to the Seller once the draft reaches its The major, and the only, purpose of INCOTERMS is to maturity. produce an internationally standardized set of regulations governing the understanding of the most commonly used D. Open Account contractual terms in overseas trade agreements and sales contracts of movable, tangible goods only. INCOTERMS do An open-account is usually agreed upon by an Invoice, by the not specify the transport details regarding the transfer and Seller and the Buyer, and the shipment and goods are received delivery of the products, and most importantly, INCOTERMS by the Buyer before payment. This payment method can put are not liable to protect a party from his own risk of loss. the Seller in too deep risks as he has to completely rely on the Buyer to pay the account as per agreement. All terms the REFRENCES general of payment, including the extra-charges and terms should be mutually understood and agreed upon prior to an [1]. Roth, William V. Jr. and Roth, William V. III, open-account initiation. It is important that the Seller must “INCOTERMS: Facilitating Trade in the Asian measure and confirm not only the Buyer's credit reliability but Pacific”, 1997, Journal of International Economic Law, also the country's acclaim as well. University of Pennsylvania, Vol. – 8, No. – 3 IV. DIFFERENCE OF THE CONTRACT AND [2]. Ramberg, Jan, “CISG and INCOTERMS 2000 in THE INCOTERMS Connection with International Commercial Transactions”, 2008, Sharing International Commercial The difference between the INCOTERMS and a contract is of Law across National Boundaries, Simmons & Hills high significance, as many may confuse these terms to be Publishing (2008), 394-403 some sort of a contract. INCOTERMS are only a means of communication and a unit of conciliation between the two [3]. UNDP Practice Guide, “Shipping and INCOTERMS”, parties involved in the exchange, it is not a contract. To be 2008, UNDP Practice Series, United Nations even clearer, these terms do not compose a contract between Development Program (www.undp.org/procurement) the Buyer and the Seller. Even if there is a condition that the [4]. Export Department, “International Commercial Terms two parties have no contractual conformity between them, (INCOTERMS)”, Export 911 (www.export911.com) they can still jointly consent on INCOTERMS and these terms do not ascertain a legal binding between the two as a complete [5]. IBT Guide, “INCOTERMS 2000 – Chart of contract. Instead, the two parties have to set up a separate Responsibility”, IBT Guide to INCOTERMS 2000, contract for the sale-purchase transaction between the two, (www.i-b-t.net/incoterms) and part of the obligations and understandings of those parties, based upon this completely separate contract, are personified [6]. SKYMART, “INCOTERMS 2010”, SKYMART in INCOTERMS, forming the legal binding now. WORLDWIDE (www.skymartworldwide.com)

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