Incoterms Explained by Foodcom

Incoterms are trade terms published by the International Chamber of Commerce relating to international imports and export. They are used in transactions or procurement operations, and their use is widely recommended. These three-letter trade clauses disclose common contractual business practices. They are primarily aimed at making all conditions clear to both parties to a contract the tasks, costs, and risks involved in transferring and delivering goods worldwide.

The classification

In Group C (Main Carriage Paid), the selling party enters into a contract of carriage with a freight forwarder and bears the cost. Here, the seller is eligible for providing the export clearance, and the risk is transferred to the buyer at the time of shipment. All post-shipment issues, transportation costs and other events are the responsibility of the buyer. This group includes the following Incoterms:

CFR

This term states that the seller shall bear the cost of transporting the product to the agreed destination. All possible risks are transferred to the buyer when the goods are loaded onto the transport vehicle. This means that the seller is only responsible for the origin costs, like export clearance and freight costs of transportation, but not for insurance or delivery to the final destination. It is recommended that CFR be used exclusively for non-containerized sea freight and inland waterway transport.

CIF

The transportation term CIF is broadly similar to the CFR clause and should be considered if the buyer requires the seller to obtain insurance. CIF requires the seller to insure the goods for 110% of the contract value under cargo clauses agreed to by both parties. In addition, the seller must provide the documents required for the transfer of the goods from the carrier to the buyer. These documents include the invoice, insurance policy and bill of lading evidencing the cost, insurance, and freight from CIF. The seller’s duty ends when the buyer receives the documents. Note, however, that CIF should only be used for non-containerized ocean freight; it should be replaced by the latter defined CIP for all other types of transportation.

CPT

The ICC endorsed Incoterm CPT (Carriage Paid To) specifies that the seller is to handle the commodities to a carrier engaged by the seller. They may give physical possession of the goods to the carrier in a manner and place appropriate to the means of transportation used. The risk passes from the seller to the buyer when the goods are delivered to the buyer by handing them over to the carrier. The seller must commission the carriage of the goods from delivery to the agreed destination.

In consequence, CFR should be applied to transportation by water, and CPT is recommended to be used for all other modes of carriage.

CIP

This provision means that the seller has to make sure the goods are delivered, and after this transfers the risks to the buyer. When then the purchase party forwards the commodities over to a carrier, he is reliable for all transit costs, providing the time of arrival to the seller, and confirm receiving invoices.

Further, Group D (Arrival) assumes that the seller is obligated to deliver the goods to a specific location or port of destination. This group includes rules such as:

DAP

Incoterms define DAP as “Delivered at Place”, where the seller delivers the goods at the disposal of the buyer at the named destination. Thus, the seller is legally considered to have delivered the goods when they are to be placed at the buyer’s disposal. Upon arrival of the transportation, the buyer must be ready to unload the goods at the designated destination. Under the terms of DAP, the seller pays all carriage expenses with any terminal costs, as well as the risk that passes from the point of arrival. After the arrival of shipment, a customs clearance in the importing country must be completed.

DPU

Under this rule, the seller is required to deliver and unload the goods at the stated destination. The seller shall carry all transportation charges, such as any export or unloading charges, from the time of collection from the primary carrier. Any charges levied at the port of destination, along with the risk only until the goods arrive at the destination. A significant note, however, is that any delay charges are usually the responsibility of the seller.

For some, the definition of “unloaded” was unclear, but this is simply described as, since the goods arrive in a container, removing the container from the vehicle may give the impression that it has been “unloaded.” But the goods themselves remain in the container.

DDP

DDP defines the seller’s responsibility to deliver the goods to the place designated by the buyer and to pay all costs of moving the goods to the destination. The most important aspect of DDP terms is that the seller is responsible for customs clearance of the goods in the buyer’s country, including payment of duties and taxes and obtaining all necessary authorizations. This clause imposes the most responsibility on the seller and minimum liability on the buyer. No risk or obligations shall pass to the buyer until the goods have been delivered to the named destination.

If the rules and regulations in the country of arrival are misunderstood, DDP terms can pose a great risk, both in terms of delays and unpredicted fees, and should be used with caution.

Group E (Departure) means that the seller makes the goods available to the buyer at the delivery point specified by the seller. The seller is not obliged to clear the goods for export, nor does he bear the risk and cost of loading, all this is in the interest of the buyer side. This group includes only one Incoterm:

EXW

As mentioned above, the choice of this term means that the buyer bears the risk of bringing the goods to their final destination. This means that the buyer has the maximum obligation and the seller has the minimum obligation. EXW is often used when making an initial offer to sell goods at no cost.

Finally, Group F (Main Carriage Unpaid) obligates the seller to clear the goods for export. The purchase party does not pay for shipping or the insurance of the product. This group includes:

FCA

The international logistics Incoterm FCA provides that the seller delivers the goods cleared for export at the agreed place. Provided the delivery is made at a location of the seller, they are responsible for hauling the goods for the buyer. However, if the delivery is made at another place, the seller is to have delivered the goods once their transportation has reached the said place. Therefore, the buyer is reliable for both discharging the goods and arranging the loading.

FAS

In this case, the seller delivers the goods that are placed alongside the buyer’s vessel at the named port of arrival. This means that the end-purchaser must pay all costs and risks of loss or damage to the goods from that point forward. The clause FAS requires the trader to provide the sold product to be cleared in clearance. This is a departure from previous versions of the Incoterms, which required the buyer to arrange authorization for export. However, if the parties wish this to be done differently, it should be made clear by explicit wording in the sales contract. Furthermore, the term should only be used for non-containerized sea freight and inland waterway transport.

FOB

Under FOB terms, the seller holds responsibility for all costs and risks up to the point when the goods are loaded. The seller must ensure that they are delivered on board, which is determined by the buyer. Therefore, in this case, the seller must ensure shipment processing through customs. On the contrary though, the buyer falls responsible for all other costs from the port of arrival in the destination. Since the introduction of Incoterms in 1980, Incoterms FCA and FOB were intended to be used exclusively for non-containerized sea and inland waterway transportation. This is why FOB is often mistakenly used for all modes of transportation, despite the contractual risks this can pose.

Trade with Foodcom S.A.

The eleven abovementioned Incoterms all differ and have their recommended uses, so that procedures achieve successful ends. And given that in the food industry we work with commodities that must be kept in unsullied conditions, these efficient supply chains can be demanding. But our team is composed of traders who comprehensively chose the most equitable mode of transportation with consultation from experienced specialists in our logistics department. Along with the help from our sales support, in Foodcom we always try hardest to find a way to work under best terms with our clients to meet their expectations. Here, we will make every effort to find solutions to any problems that may occur on our way to mutually beneficial cooperation.

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