Are you an entrepreneur? Interested in exporting or importing goods? Read on: you need to know about INCOTERMS, explained simply and briefly:
What are INCOTERMS and what are they for?
INCOTERMS are terms (EXPRESSED AS INITIALS) voluntarily accepted between buyer and seller in international trade. They govern the responsibilities of the parties to a contract for the sale of goods, and we need to know them so that international transit operations are safer.
Specifically, INCOTERMS, in order to avoid problems of interpretation of contracts by the parties, govern the following:
- When and where the transfer of risk over the goods takes place, from seller to buyer. In other words, "I am liable up to this point" or "from here on, it is on you".
- The place of delivery of the goods
- Who arranges and pays for transport and insurance costs.
- What documentation each party must process.
Read this post to the end and I will give you the #LegalHacks on the subject: practical suggestions so that you can use INCOTERMS to your advantage and avoid technical mistakes that could harm you. (If you are thinking of buying goods in Ecuador, stay until the end of the video, I have a tip especially for you)
Types of Incoterms (by MODE OF TRANSPORT)
Multimodal:
MULTIMODAL transport is that in which more than one mode of transport is involved. For example, the contract covers the Ecuadorian bananas from the moment they leave the plantation, are loaded onto the lorry, taken to the seaport and placed on the vessel; during the sea passage transhipped from a smaller vessel to a larger one (where applicable); and at destination unloaded onto a lorry, placed on a train and then onto another lorry, and left at the buyer's premises. That is, every stage and mode of transport is covered so that the cargo travels from point A in Ecuador to point B in China, for instance.
These terms are: EXW Ex Works, FCA Free Carrier, CPT Carriage Paid To, CIP Carriage and Insurance Paid To, DAP Delivered at Place, DPU Delivered at Place Unloaded, DDP Delivered Duty Paid.
Sea and inland waterway:
FAS Free Alongside Ship, FOB Free On Board, CFR Cost and Freight, CIF Cost, Insurance and Freight
Relax, friends: I am about to explain this strange parallel language. Pay attention, do not get distracted:
THE INCOTERMS IN DETAIL
Let us start with the multimodal ones:
(EXW) EX WORKS: This is the INCOTERM under which the seller delivers when the goods are placed at the buyer's disposal at the seller's premises or another named place, such as a workshop or factory, on the agreed date or within the agreed period.
The seller does not have to load the goods onto any collecting vehicle, nor clear them for export where the destination requires it. Unless otherwise agreed, these tasks are at the buyer's cost and risk. (That is, if I export cocoa, I will have performed by placing the cocoa beans at the door of my business for the buyer to collect.) Later, in #LegalHacks, I will tell you what I think of this term and my advice on it.
FCA: Free Carrier: This means the seller delivers the goods to the carrier or to the person nominated by the buyer, at the buyer's premises or another named place (the place must be specified).
Risk passes from seller to buyer at the point of delivery. Delivery is deemed complete 1. When the goods have been loaded onto the means of transport provided by the buyer, if the place of delivery is the seller's premises. 2. In any other case, when the goods are placed at the carrier's disposal on the seller's means of transport, ready for unloading. Under this term the seller may be required to clear the goods for export where applicable. (That is, if I export shrimp, delivery is deemed performed once I have loaded the boxes onto the lorry the buyer sent to my warehouse)
CPT: Carriage Paid To: This means the seller must arrange and pay the transport costs to the agreed place of destination. As with all "C" terms, the selling company performs its delivery obligation when the goods are handed over to the first carrier, not when they arrive at destination. Risk therefore passes to the buyer when the goods are delivered to the first carrier in the country of origin. Export customs clearance is at the seller's cost. (Say you export tuna to the United States: as sellers you must pay for transport to the named port, say Los Angeles on the West Coast; but your liability ends when you place the tuna on the first means of transport in Ecuador to begin the journey to the United States.)
CIP. Carriage and Insurance Paid To: the same as CPT, the only difference being that one of the parties undertakes to arrange insurance for the cargo at every stage of transport, whether by sea or not. That is, the tuna exporter pays for carriage and ceases to be liable for the cargo once it is handed to the first carrier in Ecuador, but must agree with the buyer who pays for the cargo insurance.
DAP: Delivered at Place
This means the seller delivers when the goods are placed at the buyer's disposal on the arriving means of transport, ready for unloading but not unloaded, at the agreed point of destination. Export customs clearance is at the seller's cost. (Say you export mangoes: you handle the customs and port formalities in Ecuador and are liable up to the port of destination and for having the goods ready for unloading, without the mango exporter being obliged to carry out the unloading operation.) This is considered a "DOOR TO DOOR" term.
DPU: Delivered at Place Unloaded is identical to the DAP explained above, the only difference being, following the previous example, that the mango seller does undertake the unloading operation at destination. This is the only INCOTERM under which the seller assumes responsibility for unloading.
DDP: Delivered Duty Paid: Under this term the seller takes on maximum responsibility. It means the seller delivers when the goods are placed at the buyer's disposal on the arriving means of transport, ready for unloading (but not unloaded) at the named point of destination, cleared for import. The seller takes on high risk and responsibility, since they must not only bear the cost of transport and risk from origin to the buyer's warehouse at destination, but also handle and pay the corresponding customs formalities and taxes in the country of destination. The only thing they are not obliged to do is unload the goods at the destination warehouse.
(For example, if you export heart of palm to the Port of Tel Aviv in Israel, you will be liable until the cargo reaches the importer's warehouse in Tel Aviv, on the means of transport and ready to be unloaded by the buyer, with the exporting company bearing all formalities both at origin and destination so that the cargo reaches the agreed place.)
Now let us look at the terms exclusive to sea and inland waterway transport (NOT for all modes of transport, unlike the previous ones):
FAS: Free Alongside Ship: This means the seller delivers when the goods are placed alongside the vessel nominated by the buyer at the named port of shipment. If there is no specific delivery point and several are available, the seller may choose the one that suits them best. It is an advisable contract, since the risks are few and, by handling the customs formalities, the invoices and all supporting documents remain with the seller for tax and other purposes. It is generally used to export bulk goods such as coal, molasses or scrap metal, or special cargo such as turbines, large engines and buses. It is not recommended when the goods travel in containers: for that there is FCA, Free Carrier, seen a moment ago. (For example, if you export scrap metal you must carry out and pay for all customs formalities and place it alongside the vessel to be loaded properly; your liability ends there.)
FOB: Free On Board: This is one of the most used and traditional terms. It means the seller delivers the goods on board the vessel nominated by the buyer at the named port of shipment. Risk passes once the goods are on board, with the seller bearing the costs and risks of handling the goods to load them on board. Export customs clearance is at the seller's cost. For example, if you sell bananas you are obliged to carry out all the formalities for the bananas to be loaded onto the vessel; from then on it is the buyer's responsibility.
CFR: Cost and Freight: This means the seller delivers the goods on board the vessel and must arrange and pay the costs and freight to the named port of destination. The seller bears the cost of carriage to the agreed destination but passes risk to the buyer when the goods are delivered to the first carrier, unless the contract of sale states otherwise. If the parties wish risk to pass at a later stage, for example at an intermediate seaport, they must specify this in the contract of sale. Customs clearance is at the seller's cost. (For example, if you are exporting frozen fish, your liability ends when you hand over the cargo at the Ecuadorian port; but you must pay the full cost of transport to destination.)
CIF: Cost, Insurance and Freight
This means the seller delivers the goods on board the vessel and must arrange and pay the costs, insurance and freight to the named port of destination. The seller bears the cost of carriage to the agreed destination but passes risk to the buyer when the goods are delivered to the first carrier, unless the contract of sale states otherwise. Export customs clearance is at the seller's cost. For example, if an Ecuadorian company sells shrimp to China under this term, the shrimp company must pay all logistics costs, the cargo insurance and the sea freight; naturally, it will build all these costs into the contract price, plus its margin and a buffer for contingencies. Here, risk passes to the buyer once the shrimp exporter delivers the product onto the vessel or to the carrier named in the contract.
#LegalHacks
1. INCOTERMS are created by the International Chamber of Commerce (ICC); the latest version is that of 2020. Earlier versions remain valid, however, if the parties expressly submit to them in the international contract for the sale of goods.
INCOTERMS ARE THEREFORE NOT LAW: THEY ONLY BECOME BINDING IF THE PARTIES INVOKE THEM IN THEIR CONTRACTS.
2. Once the APPLICABLE INCOTERM has been negotiated, the contract of sale must state the INCOTERM together with the version under which the terms of sale were agreed, along with the agreed geographical place of delivery of the goods. If I am shipping bananas FOB from Guayaquil, Ecuador to Ganzhou, China, it should read like this in the contract:
"FOB Guayaquil, Incoterms 2020" — because the bananas are delivered on board the vessel berthed at the port of Guayaquil.
3. NO EXW
EX WORKS is a dangerous INCOTERM except in conditions of complete trust, because the seller loses control of the goods and any assurance that the export formalities are carried out correctly; and so does the buyer, who must bear all costs from collection and loading in the country of origin onwards, along with all documentary and customs formalities.
2. FCA instead of FOB.
FCA, Free Carrier, is the INCOTERM that should replace the widely used FOB for container shipments, since this way the seller avoids port handling and loading costs that are outside their control, as they are contracted by the buyer.
3. Careful with CPT (Carriage Paid To): nobody is obliged to arrange insurance. You may use CIP or CIF as you see fit.
4. Careful with DAP (Delivered at Place) and DPU (Delivered at Place Unloaded): Given the liability and the journey to be covered by the seller — FROM ECUADOR UNTIL THE GOODS ARE READY FOR UNLOADING OR MUST BE UNLOADED AT DESTINATION — in countries without genuinely modern port and maritime infrastructure problems are more likely, and therefore the costs for the seller could become uncontrollable. (Say you are exporting coffee to Afghanistan: ANYTHING COULD HAPPEN. In such cases it would be better to use terms such as CIP and CIF, where risk would pass in Ecuador, not in Afghanistan.)
5. If you are the seller, do not use DDP — THE TERM UNDER WHICH YOU TAKE ON ALMOST EVERYTHING — unless you have absolute control of the costs at the port of destination and are tax-resident in that country, since all the expenses incurred at destination could then be deducted for tax. If you are not resident in the country of destination, say goodbye to any deduction or tax benefit.
6. Keep your eyes wide open when exporting FOB, since difficulties can arise in obtaining a Bill of Lading, a document required when payment is by documentary credit. I promise to cover this in a future video. For these reasons, if the shipment travels in a sea container, the recommendation would be to use FCA at the port of shipment, avoiding documentation difficulties and gaining greater control over costs.
7. If you are not in Ecuador and you are thinking about buying goods in our country, let me tell you, we have the best bananas and shrimps in the world; What I can recommend to you, first of all, is that you hire an specialized and English speaking legal advisor, which will ensure the success of your transactions, right from the start.
If you have any questions, write to me: info@fabriziogarcia.com or keep visiting the blog at /en/blog/
Att.
Fabrizio