TT Talk - Trade ‘Esperanto’ still requires understanding
Supply chain management and contracts of carriage are, inevitably, derivations of sale contracts. The interface between the different types of contracts and the parties involved can be critical to keep things moving smoothly and resolve misunderstandings.
Incoterms® are important!
Learning a foreign language involves a mixture of skills; it’s a lot more than just words and syntax - it is vital to have an understanding of the culture, context and nuances involved behind communication. Many aspects of international trade can be similarly fraught and complex, which is precisely why ‘Incoterms®‘ (Intermational Commercial Terms) were first launched back in 1936.
The terms have been developed and maintained by experts and practitioners brought together by the ICC (International Chamber of Commerce), and have become the standard international business terms defining the roles of sellers and buyers within the sale process, particularly relating to the transfer of risks as goods proceed from origin to destination. The latest (eighth) and current version was issued in 2010 and became effective at the beginning of 2011. Although integral to international sales agreements, certain terms are equally valid for domestic and ‘trade bloc’ use.
What are Incoterms®?
Incoterms® provide a series of three-letter trade terms describing common sales practices, intended to communicate clearly the tasks, costs and risks associated with the transportation and delivery of goods. They are accepted worldwide for the consistent interpretation of the most commonly required processes in international trade. They are designed to reduce - or eliminate altogether - uncertainties arising from different practices around the globe.
The current publication defines 11 terms, which are subdivided into two categories based on the delivery method, reflecting the multimodal options. Seven of the rules apply to any mode of transport, with the other four solely applicable to sales that involve transportation by water (sea or inland waterway). The terms ensure that both the buyer and seller reach agreement as to:
- who is responsible for the cost of transporting the goods, including insurance, taxes and duties (whether export or import);
- where the goods can be considered as delivered, linking to the requirement to make payment; and
- who is at risk for anything that might befall the goods at each step during transportation.
Any mode of transport
- EXW Ex Works (named place of delivery)
- FCA Free Carrier (named place of delivery)
- CPT Carriage Paid To (named place of destination)
- CIP Carriage and Insurance Paid to (named place of destination)
- DAT Delivered at Terminal (named terminal at port or place of destination)
- DAP Delivered at Place (named place of destination)
- DDP Delivered Duty Paid (named place of destination)
Sea & inland waterway transport
- FAS Free Alongside Ship (named port of shipment)
- FOB Free on Board (named port of shipment)
- CFR Cost and Freight (named port of destination)
- CIF Cost, Insurance and Freight (named port of destination)
Incorporation of the relevant term into a contract of sale is always linked to a physical location at which point the described responsibilities and obligations transfer; they do not themselves transfer ownership or title. It is important to remember that previous versions of Incoterms® remain valid and therefore, in addition to specifying a place the traders also need to stipulate the edition year – ‘CIP Hamburg Incoterms® 2000’ and ‘CIP Hamburg Incoterms® 2010’ are both valid! Traders need to specify the place or port as precisely as possible.
Beware these issues
Detailed information on Incoterms® is available from ICC. The purpose of this article is, however, not to provide the details, rather highlight some misconceptions and potential issues for parties in the supply chain. Thus, traders may assume that when the seller pays the freight, the risk of loss remains with the seller until the goods are delivered to the place or port specified in the contract of carriage. However, when using Incoterms® CPT (Carriage Paid To), CIP (Carriage & Insurance Paid), CFR (Cost and Freight) or CIF (Cost, Insurance and Freight), risk transfers to the buyer at the point the seller hands the goods over to the carrier at origin, rather than the named place or port of destination.
Perhaps more pertinently, where the traders agree that the seller should purchase insurance, the obligation is merely to take the minimum cover, typically the (restricted) specified perils of ‘Institute Cargo Clauses (C)’. It may be more appropriate for the buyer to arrange the ‘all risks’ cargo cover under ‘Institute Cargo Clauses (A)’.
Incoterms® are crucial for forwarders and logistics operators because they indicate which party - seller or buyer - is able to give instructions in regards to the goods in transit and, of course, who is responsible to pay which costs. It is important to recognise that the terms may not always make clear who is responsible for each element of the charges. For example, a seller under FCA (Free Carrier) fulfils his obligations when he hands over the goods, cleared for export, into the charge of the carrier named by the buyer at the named place or point, but it is possible that nobody has specified who pays for Terminal Handling Charges. Equally, with increasingly common ‘advanced cargo information’ requirements, it is worth checking that the traders will provide the required data to ensure that the declaration deadlines can be met and penalties avoided.
The reason to understand
Since elements of the sales contract therefore define what happens through the supply chain, impacting carriage contracts, it is worth understanding how they work. The relevance of these acronyms is of material interest to all parties, including in the event of an incident during transit, where specific instructions may be required from either the buyer or the seller – and the forwarder may be acting for both.
We hope that you will have found the above interesting. If you would like further information, or have any comments, please email us, or take this opportunity to forward to any colleagues who you may feel would be interested...
We look forward to hearing from you.
Risk Management Director, TT Club