INCO terms explained

Please note these terms are provided as your learning guide only and NOT TO BE USED COMMERICALLY .

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EXW

Ex Works

EXW (Ex Works) represents the minimum involvement of the seller and the maximum involvement of the buyer in the movement of the goods from the point of ‘works’. The statement ‘EXW’ must be qualified to give the address of the ‘works’, which may be a factory, site or warehouse etc. Care should be taken to note that the actual point of manufacture might well vary from the place where the seller operates their commercial undertaking. Under INCOTERMS 2000, risk and responsibility pass from the seller to the buyer when the cargo is made available on the ground at the ‘works’, at or on the agreed future date or future time, uncleared through customs. The seller must give advance notice of availability (how much notice would have to be predetermined e.g. through the sales contract). This point is important as the buyer assumes liability for all risks from the time of availability on the ground and is therefore exposed from that moment up to the event of collection. During this period, the buyer is liable for all risks to the cargo, even though they are not yet under the buyer’s physical control, and this is further aggravated by the fact that the goods are generally uninsured throughout this period too. The buyer and seller should only consider EXW when the buyer can actually arrange the customs clearing prior to export and for the immediate collection of the cargo on availability. The Seller should note that the export of the goods is NOT guaranteed under EXW and the buyer may, for example, opt to keep the goods in the country of origin. Although EXW is a popular term it remains complex. EXW is rarely compatible with documentary credits (for example) – and the term FCA often offers a more manageable alternative. transaction is not land-based. (i.e. it is not exclusively road or rail or a road/rail combination)
EXW (Ex Works) represents the minimum involvement of the seller and the maximum involvement of the buyer in the movement of the goods from the point of ‘works’. The statement ‘EXW’ must be qualified to give the address of the ‘works’, which may be a factory, site or warehouse etc. Care should be taken to note that the actual point of manufacture might well vary from the place where the seller operates their commercial undertaking. Under INCOTERMS 2000, risk and responsibility pass from the seller to the buyer when the cargo is made available on the ground at the ‘works’, at or on the agreed future date or future time, uncleared through customs. The seller must give advance notice of availability (how much notice would have to be predetermined e.g. through the sales contract). This point is important as the buyer assumes liability for all risks from the time of availability on the ground and is therefore exposed from that moment up to the event of collection. During this period, the buyer is liable for all risks to the cargo, even though they are not yet under the buyer’s physical control, and this is further aggravated by the fact that the goods are generally uninsured throughout this period too. The buyer and seller should only consider EXW when the buyer can actually arrange the customs clearing prior to export and for the immediate collection of the cargo on availability. The Seller should note that the export of the goods is NOT guaranteed under EXW and the buyer may, for example, opt to keep the goods in the country of origin. Although EXW is a popular term it remains complex. EXW is rarely compatible with documentary credits (for example) – and the term FCA often offers a more manageable alternative. transaction is not land-based. (i.e. it is not exclusively road or rail or a road/rail combination)
FCA (Free Carrier) defines the conditions under which many sellers and buyers actually transfer risks. FCA must be qualified by both naming the place where risks and responsibilities pass from the seller to the buyer and by identifying the carrier the buyer has appointed. FCA requires the seller to take responsibility for risks and costs up to this handover, including export customs clearance. It is important to consider that the nature of the carrier being used, and the various points of transfer that different modes of transport may involve, are subject to extreme variables. It is common that the transport used to deliver or handover is a different than the actual transport to be used for the main carriage (e.g. collected by road for an airfreight export). The term may well involve detailed instruction to make such distinctions and it should be noted that multimodal transport documents better serve this term than traditional documents such as Bills of Lading or Airwaybills. For deep-sea transactions, FCA represents an excellent alternative to FOB, which is inappropriate in most modern port operations. However, under FCA the seller hands over risks/control of the cargo at a point prior to the vessel, frequently prior to the port. Although this reflects the physical condition of much seafreight trade conducted using ‘FOB’; it is a departure from the commoner financial interpretation of ‘FOB’. This normally obligates the seller to pay for the origin handling/loading and/or stowage charges raised by the port. Under FCA, these charges are for the buyer’s account. If this is not acceptable, the term may be modified to represent the passage of FCA risks with ‘FOB’ costs. FCA may involve the carrier collecting from the seller or the seller delivering to the carrier, dependant on the conditions of the sales contract.
FAS (Free Alongside Ship) is Monomodal in that it may only be used for transaction where the main carriage is by seafreight. Note that the entire journey need not be by sea, but the moment of ‘export’ must be. Under this term, which has a considerably long tradition, risk and responsibility pass from the seller to the buyer when the goods are placed alongside a named ship (or a ship operated by a named service) at a named area within a named port. FAS requires the seller to arrange export customs clearing. The essential aspect of the term is that the vessel is in port prior to the seller delivering the cargo into the port area. However, in many markets, the seller is not allowed into the harbour area. Even if the seller can enter the port area, most operations involve the placing of cargo into a berth where the vessel in question is intended to arrive, as opposed to it having physically docked prior to the arrival of the cargo. Thus the vessel comes to the cargo rather then the cargo coming to the vessel. There are significant risks associated with the older seafreight terms (such as FAS, FOB, CFR/CIF etc) specifically with regard to the transport documents issued. Careful consideration should be given to the appropriate section of the official INCOTERMS 2000 text dealing with ‘proof of delivery’. In many cases, the modern documents issued by lines may present risk-management complications to the seller when using such an old term as FAS. The use of this term in the charter and bulk markets is attractive as an alternative to many of the traditional chartering terms that are often subject to unique definitions from country to country – or even between ports within one country.
FOB (Free On Board) – is one of the commoner trade terms in use. Yet this ‘common’ aspect of the term has resulted in the myriad definitions found all over the world for FOB. Some of these directly contradict others, and many are supported by domestic legislation making such definitions unique to a specific country or port. In defining FOB as an INCOTERM, it is expressed as being Monomodal and it can only be used for transactions where seafreight is the main carriage. Therefore, as an INCOTERM, there is no application for FOB in road, rail or air transport. Under INCOTERMS 2000, risk and responsibility pass from the seller to the buyer when the goods pass over the (named or unnamed) ship’s rail at the (named) port of loading, cleared for export by the seller. For FOB to apply, the seller must be in the physical position of being able to load the cargo over the rail under their own direct control i.e. the loading is undertaken by the seller’s own labour, or by an agent that is under the contractual control of the seller. Further this process would have to be monitored by both the seller and buyer or their representatives. Generally, from the modern deep-sea export perspective, this control often cannot be achieved as the seller is either not allowed into the harbour area or, even in those extreme circumstances where they are, they have no influence over the party loading the vessel. The INCOTERM FOB still has an application in some markets, but these are more and more in the minority. Note that the use of an ‘on-board’ Bill of Lading or mate’s receipt could be appropriate in recording the passage of risks under FOB making FOB one of the few terms still unavoidably dependant on such documents.
Terms beginning ‘C’ are ‘Contracts of Dispatch’. They differ from other INCOTERMS as they segregate the point at which risk and responsibility passes from the point at which costs pass. Under all other terms, the point of transferring risk and the point at which responsibility for cost is also transferred are simultaneous. With the ‘C’ terms this is NOT the case. CFR (Cost and Freight) – has a long history and outside of INCOTERMS a definition with consensus is difficult. As an INCOTERM risk passes from the seller to the buyer when the cargo crosses the ship’s rail at the origin port. However, the responsibilities for the costs of transit only pass from the seller to the buyer at the destination port. CFR and CIF are Monomodal expressions used when the main carriage is by sea and both are suited to the use of Bills of Lading. Because the ship’s rail is seen as triggering these terms, it is often inappropriate to use either in a modern port and reference should be made to the notes on this subject under FOB. Buyers are disadvantaged with contracts of dispatch. The buyer must take risks for a period of carriage during which the buyer has no means of controlling or limiting those risks. The carrier used; the costs incurred for carriage and the timing of the carriage are all under the seller’s control. The buyer must consider this disparity before accepting a C termed contract. From the seller’s perspective, the C terms represent exceptional risk-management opportunities and are actively pursued as a consequence. CIF (Cost, Insurance and Freight) – represents the condition of CFR with the addition of Insurance. This is the first of only two terms that place a compulsory responsibility for insurance on the seller. Under all ther terms, the buyer considers insurance as an optional responsibility. (Refer CIP)
CPT (Carriage Paid To) – is the multimodal equivalent of CFR. The named place where the seller’s costs end can be a point other than a seaport (as well as being a seaport), in the buyer’s country. CPT may be used for airfreight, roadfreight and railfreight as well as for seafreight when the ship’s rail serves no purpose. E.g. if the destination is an inland point or a modern port with conditions as discussed under FOB. CPT requires the use of multimodal documents and documents such as Bills of Lading or Airwaybills may prove inappropriate in recording the passage of risks under this term. Under CPT, risk and responsibility passes when the cargo is handed to the first carrier (with a carrier defined as either an Actual or Contractual carrier i.e. a Freight Forwarder or Multi Transport Operator could act as ‘carrier’ as could an airline or shipping line). However, responsibility for costs only transfer when the goods arrive at the stated place where carriage is ‘paid to’. The diagram represents this condition with a brace, indicating that the place where carriage is paid to may be any point in the country of destination. The cautions expressed for buyers using CFR are equally applicable to CPT with added complications in that the transfer of risks can begin earlier. If the carrier is collecting the cargo from the seller’s premises then the risks of carriage pass to the buyer at that point, while the buyer’s ability to control the costs and timing of carriage only pass at the destination point. Although these reservations warrant serious consideration for a buyer, they represent great risk-anagement opportunities for the seller. CIP (Carriage & Insurance Paid to) – represents CPT with the inclusion of Insurance. The cautions and notes made regarding CPT equally apply to CIP.
Terms prefixed ‘D’ are ‘Contracts of Arrival’ involving the passing of risk and responsibility at the point where costs also terminate. DES (Delivered Ex Ship) – is Monomodal. Although not triggered by the use of the ship’s rail, the point of handover (ship’s side, arrived) will be inappropriate in a modern port. The buyer may not be able to take control at a point in a restricted port area. An alternative D term such as DDU might be better suited to represent an achievable point of handover for both parties. DES will often financially correlate to CFR. But, for the buyer DES represents CFR without the disadvantages of placing risks on the buyer, over which they have no control. (See CFR)From the seller’s perspective, DES reverses the risk advantages of CFR, placing all risks with the seller until the cargo arrives at the named port. DEQ (Delivered Ex Quay) – extends the shipper’s responsibility beyond the arrival of the vessel to the point where the goods are discharged. Although not triggered by the use of the ship’s rail, the point of handover (landside on the harbour, duty paid) is frequently inappropriate in a modern port environment. The buyer may not be able to take control at that point and an alternative D term such as DDP may be better suited to identify an chievable point of handover between the two parties. Seller’s using DEQ are cautioned that they must be in a position to pay the destination discharge fees both in physical terms as well as administratively in accordance with any Exchange Control Regulations applicable in the country of Origin. Caution is appropriate when using D prefixed terms with Documentary Credits as few ‘documents’ are geared to record the passing of risks on arrival.
DAP (Delivered At Place) – is a Multimodal term that must be further qualified by naming the place up to which the seller is prepared to take responsibility for transport costs (and the corresponding risks of transit). This is excluding the payment of domestic duties and the ancillary clearance charges associated with the import process at destination. DDU will often financially correlate to CPT. But, for the buyer DDU represents CPT without the disadvantages of placing risks on the buyer, over which they have no control. (See CPT) From the seller’s perspective, DDU reverses the risk advantages of CPT, placing all risks with the seller until the cargo arrives at the named port. As with all of the D prefixed terms, this term is not easy to use in conjunction with a Documentary Credit and as a multimodal term, would require the use of Multimodal transport documents over any traditional monomodal documents such as Bills of Lading or Airwaybills. Sellers are further cautioned that, if the intended transit is beyond the point of entry in the country of destination, then their ability to move the goods to the final destination may be dependent on the buyer’s ability to first clear the goods through the customs authority. The possibility of delays in transit and any resultant storage charges (should the buyer fail to conduct clearance in good time), should be noted. Seller’s should be equally aware of additional charges which may be due for payment resultant from local taxes which do not fall into the category of ‘duty’, but are nevertheless payable prior to release. DDU (and DDP) correlates closely to the generic expressions of ‘free domicile’, ‘franco domicile’ and ‘free house’, which are frequently used in the transport industry. Each should be avoided due to their ambiguous nature.
DDP (Delivered Duty Paid) – is a Multimodal term that must be qualified by naming the place to which the seller is taking responsibility for transport costs and the risks of transit. These risks and costs include the payment of domestic duties in the buyer’s country and any ancillary charges associated with the import clearing process at destination. As with all of the D prefixed terms, this term is not easy to use in conjunction with a Documentary Credit and in the case of DDP this payment difficulty extends to any form of Exchange document. As a multimodal term, DDP requires the use of Multimodal transport documents over monomodal documents such as Bills of Lading or Airwaybills. Sellers are cautioned that the payment of foreign duties and taxes may be contrary to the Exchange Control regulations of their country and that they should seek clarity on this point from their bank or appropriate authority. Equally, both parties should consider VAT if payable in the buyer’s country. DDP may be modified to exclude the seller from having to pay a VAT that the buyer could recover directly. If this is not done, the seller’s price may include this amount which otherwise could actually be recovered by the buyer. Regulations regarding sellers claiming VAT paid to foreign revenue services vary from country to country, and there is no clear-cut position in this matter. Both parties should seek guidance in this. Additionally, although the seller will pay Duties, the buyer would be named on the import customs entry and will have the obligation to the domestic Customs Authority for the accuracy of the declared tariff headings used and the rates of duty applied. Should these subsequently prove to be incorrect the buyer will have the obligation to bring any under recovery to account.
DAF (Delivered At Frontier) – is a monomodal (land) expression which should be further qualified by naming the frontier (border post) up to which the seller is prepared to take responsibility for transport costs and the corresponding risks of transit. The frontier is deemed to be on the seller’s side of the applicable border unless the term is modified to express that the point of transfer is the frontier on the buyer’s side of the border. The seller must clear the cargo through customs on the export side of the border of handover, whereas the buyer must clear the goods through customs on the import side. Because the Frontier falls on the seller’s side of the border, DAF can vary from other D terms in that the seller may not be responsible for all or even a part of the main carriage. For example, if the transit involved the movement of cargo through several frontiers, the seller may pass risk and responsibility at the first of these, obligating the buyer to arrange the main carriage thereafter. As a land term the application of DAF is for land-based operations and other D terms such as DDU or DDP should be considered if the transaction is not land-based. (i.e. it is not exclusively road or rail or a road/rail combination)

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