Incoterms | Commercial terms used in International Trade | Meaning

Export price quotations and incoterms

It is quite usual to use certain trade terms in the international trade. These are the terms defined by the international chamber of commerce to express the sale price. These terms also fix the corresponding rights and liabilities of the seller and buyer to the trade contract.

The “Incoterms” is a set of International rules published by the International chamber of commerce in 1936 for the interpretation of trade terms. However, amendments have been made in Incoterms in the years 1953, 1967, 1980, 1990 and 2000 to bring about uniformity in international trade practices.

What do incoterms indicate?

Incoterms used all over the world indicate

  • the charge and expenses to be paid by the seller
  • the place of delivery of goods
  • the point in time expressing the transfer of goods and their transit risks
  • uniform export terms for delivery.

The following are the list of commercial terms used in international trade and the documents required under them.

Commercial terms used in International Trade

1. EXW — Ex Works: Under this term, delivery is complete when goods at the disposal of the buyer are placed at the place specified therein. The place may be own premises of the seller like works, factory or warehouses. This term imposes only a minimum obligation on the seller. The buyer is liable to bear all costs and risks. The buyer has to carry out the export formalities himself. When the products are heavy and their shipping freight and transportation charges cannot be worked out in advance, EXW quotation is followed.

2. FCA — Free Carrier: Under FCA term, the seller should deliver the goods to the carrier nominated by the buyer at the named place cleared for export. Sometimes, instead of specifying the carrier, a person is nominated. Then, the seller’s obligation to deliver the goods becomes complete when the goods are delivered to that person. This term can be used even when more than one transport mode is used.

3. FAS — Free Alongside Ship: Under this type of quotation, the exporter bears all the expenses up to placing the goods alongside the vessel at the named port of shipment. This means that the expenses incurred over placing the goods on board the ship are to be borne by the buyer. From the moment goods are placed alongside the ship, the buyer bears all costs and risks of loss or damage to the goods. This term is suitable for sea or inland water transport.

4. FOB — Free on Board: Free on board is the most common term used in international marketing. FOB means the exporter is responsible for loading the goods on board the ship. Delivery of goods occurs as soon as the goods are loaded on the ship. From that point onward, the buyer is liable to bear all costs and risks. In other words, the goods and transit risks are transferred to the buyer when the goods are taken to ship’s rail.

5. CFR — Cost and Freight: CFR quotation includes FOB price and also an additional freight paid to bring the goods to the named port of destination. Thus, under cost and Freight price, the seller pays the freight till the goods are brought to the named port of destination. But the buyer is liable to bear risk of loss or damage to goods and any additional costs occurring after taking delivery.

6. CIF- Cost, Insurance and Freight: Under CIF quotation, the price includes the cost of the product, insurance premium and freight charges required to bring the goods to the place specified in the contract. The seller’s obligation is complete on the delivery of goods at the named port of destination. Any risk of loss or damage to the goods and additional costs occurring after the time of delivery are transferred to the buyer. The seller takes an insurance policy only for minimum cover. If the seller needs a greater cover for the goods, then he should take an additional insurance cover.

7. CPT- Carriage Paid to: Under CPT, the seller is obliged to deliver the goods to the carrier nominated by him. When subsequent carriers are used, the obligation of the seller is complete over the delivery of goods to the first Carrier. Thereafter, the risk passes on to the buyer.

8. CIP — Carriage and Insurance Paid To: The seller, in addition to CPT obtains an insurance policy to protect the goods in transit against risk of loss or damages. So, risk of loss or damage to the goods is borne by the seller only during the carriage. Normally, the sellers pay premium only for a minimum cover. If the buyer wants any additional cover, he should either have express arrangement with the seller or make his own arrangement. Where subsequent carriers are used for the transportation of goods, the seller’s liability is over with the delivery of goods to the first carrier. The seller will not be responsible for any risk of loss or damage to the goods in subsequent carriers.

9. DAF- Delivered at Frontier: The term frontier includes the frontier of the country of export. So, the point and the place in the term are of vital importance in DAF price. The seller delivers by placing the goods at the disposal of the buyer at the named point or place at the frontier. This is well before the customs check-point at the adjoining country. For holding the seller liable for unloading of goods and the risk and cost thereof, explicit wordings should be included in the contract.

10. DES — Delivered Exship: Under DES term, the seller meets all the costs and risks involved in bringing goods to the named port of destination before their discharge. Thus, the seller delivers the goods at the disposal of the buyer on board the ship even when the goods are not cleared for import at the named port of destination. This term may be used for sea or inland waterways.

11. DEQ — Delivered Ex Quay: Under this term, the seller bears the costs and risks of discharging goods at the quay in addition to costs and risks involved in DES price, If the buyer wants to hold the seller liable from quay to another place like warehouse or terminal transport station, DDU or DDP prices should be chosen.

12. DDU – Delivered Duty Unpaid: Under this team, the seller delivers the goods to the buyer not cleared for transport. This implies that the seller bears all the costs and risks involved in bringing the goods to the named place of distribution. But any duty for import should be paid by the buyer. The term duty includes the responsibility for the risk of the carrying out the customs formalities. It also include payment of customs duties, taxes and other charges. Such duty has to be borne by the buyer.

13. DDP Delivered Duty Paid: Under this term, the seller bears all the costs and risk of loss including duty for import. So, this term imposes maximum obligation on part of the seller. Thus quotation is not suitable where the seller is unable to obtain import clearance.

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