CHAPTER 2 SPECIAL TRADE TERMS: INCOTERMS 2000

PROFESSOR DR. ABDUL GHAFUR HAMID

2.1 SPECIAL TRADE TERMS

There are a number of special trade terms such as CIF, FOB, and FAS, developed by international mercantile custom. These terms define the rights and duties of the seller and the buyer as regards the point of delivery, shipment, procurement of transport documents, and so on.

2. 2 INCOTERMS 2000
The special trade terms over the time came to be variously interpreted. This can give rise to misunderstandings, disputes and litigation with all the waste of time and money. In order to remedy these problems the International Chamber of Commerce (ICC) set out to standardize the rules of interpretation of these terms.

The first set of rules was known as Incoterms 1936. Incoterms is the short form of International Commercial Terms. Amendments and additions were later made in 1953, 1967, 1976, 1980, 1990 and presently in 2000 in order to bring the rules in line with current international trade practices.

 The newest set, Incoterms 2000, came into force on Jan, 1, 2000, replacing Incoterms 1990. A trader may describe quite simply in his contract that delivery is, say DDU Singapore (Incoterms 2000), without requiring to set out in full the duties and rights of both parties.

As far as the courts are concerned, this description means that traders have agreed to be governed by Incoterms 2000, applicable to DDU contracts. Any variation of the duties and rights set out in Incoterms 2000 must be clear and precise. Otherwise, the presumption will be that no variation was intended.

The purpose of Incoterms The purpose of Incoterms is to provide a set of international rules for the interpretation of the most commonly used trade terms in foreign trade. Thus, the uncertainties of different interpretations of such terms in different countries can be avoided or at least reduced to a considerable degree.

The scope of Incoterms

The scope of Incoterms is limited to matters relating to the rights and obligations of the parties to the contract of sale with respect to the delivery of goods sold. Although Incoterms are extremely important for the implementation of the contract of sale, a great number of problems which may occur in such a contract are not dealt with at all.

The scope of Incoterms [Cont.] For example, transfer of ownership, breaches of contract and their consequences, and exemptions from liability are not dealt with by Incoterms. Incoterms are not intended to replace such contract terms that are needed for a complete contract of sale.

The structure of Incoterms

The Incoterms (the current 13 terms) are grouped in four basically different categories: (1) The E term: EXW [Ex Work], whereby the seller only makes the goods available to the buyer at the seller's own premises. (2) The F terms: [FCA, FAS and FOB], whereby the seller is called upon to deliver the goods to a carrier appointed by the buyer.

The structure of Incoterms [Cont.]

The C terms: [CFR, CIF, CPT and CIP ], whereby the seller has to contract for carriage, but without assuming the risk of loss of or damage to the goods or additional costs due to events occurring after shipment and dispatch. The D terms: [DAF, DES, DEQ, DDU and DDP], whereby the seller has to bear all costs and risks needed to bring the goods to the place of destination.

Chart of Incoterms 2000 (13 Terms) [E and F Terms]

Incoterms 2000 [Cont.]

[C Terms]

Incoterms 2000 [Cont.]

[D Terms]

EXW [EX WORKS] (... named place)

X works means that the seller delivers when he places the goods at the disposal of the buyer at the seller's premises (or works, factory, warehouse, etc.) not cleared for export and not loaded on any collecting vehicle. This term thus represents the minimum obligation for the seller, and the buyer has to bear all costs and risks involved in taking the goods from the seller's premises.

FAS [Free Alongside Ship] (... named port of shipment) FAS means that the seller delivers when the goods are placed alongside the vessel at the named port of shipment. This means that the buyer has to bear all costs and risks of loss of or damage to the goods from that moment.

FOB [Free On Board] (... named port of shipment)

FOB means that the seller delivers when the goods pass the ship's rail at the named port of shipment. The buyer has to bear all costs and risks of loss of or damage to the goods from that point. The FOB term requires the seller to clear the goods for export. This term can be used only for sea or inland waterway transport. If the parties do not intend to deliver the goods across the ship's rail, the FCA term should be used.

Rights and obligations of seller and buyer under FOB (Incoterms 2000) (Incoterms Sellers obligation (A 1): [To provide goods in conformity with the contract] The seller must provide the goods and the commercial invoice, in conformity with the contract. Buyers obligation (B 1): [Payment of the price] The buyer must pay the price as provided in the contract of sale

Sellers (A 2); Buyers (B 2) Seller Buyer Seller: [Export licenses and customs formalities] The seller must obtain at his own risk and expense export license and carry out all customs formalities necessary for the export of the goods. Buyer: [Import licenses and customs formalities] The buyer must obtain at his own risk and expense any import license, and carry out customs formalities for the import of the goods.

Sellers (A 3); Buyers (B 3) Seller Buyer

Seller: [Contracts of carriage and insurance] No obligation. Buyer: [Contracts of carriage and insurance] Contract of carriage The buyer must contract at his own expense for the carriage of the goods from the named port of shipment. Contract of insurance No obligation.

Sellers (A 4); Buyers (B 4) Seller Buyer Seller: [Delivery] The seller must deliver the goods on the date or within the agreed period at the named port of shipment and in the manner customary at the port on board the vessel nominated by the buyer. Buyer: [Taking delivery] The buyer must take delivery of the goods when they have been delivered.

Sellers (A 5); Buyers (B 5) Seller Buyer Seller: [Transfer of risks] The seller must bear all risks of loss of or damage to the goods until such time as they have passed the ship's rail at the named port of shipment. Buyer: [Transfer of risks] The buyer must bear all risks of loss of or damage to the goods from the time they have passed the ship's rail at the named port of shipment; and

Sellers (A 6); Buyers (B 6) Seller Buyer Seller: [Division of costs] The seller must pay all costs relating to the goods until such time as they have been delivered and the costs of customs and other charges payable upon export of the goods. Buyer: [Division of costs] The buyer must pay all costs relating to the goods from the time they have been delivered and all duties and the costs of carrying out customs formalities payable upon import of the goods.

Sellers (A 7); Buyers (B 7) Seller Buyer

Seller: [Notice to the buyer] The seller must give the buyer sufficient notice that the goods have been delivered in accordance with A4 Buyer: [Notice to the seller] The buyer must give the seller sufficient notice of the vessel name, loading point and required delivery time.

Sellers (A 8); Buyers (B 8) Seller Buyer Seller: [Proof of delivery, trans. document] The seller must provide the buyer at the seller's expense with the usual proof of delivery in accordance with A4. Unless the document referred to above is the transport document, the seller must render the buyer, at the latter's request and expense, every assistance in obtaining a transport document. Buyer: [Proof of delivery, trans. doc.] The buyer must accept the proof of delivery.

Sellers (A 9); Buyers (B 9) Seller Buyer Seller: [Checking, packaging, marking] The seller must pay the costs of checking quality, measuring, weighing, counting, which are necessary for the purpose of delivering the goods in accordance with A4. Buyer: [Inspection of goods] The buyer must pay the costs of any pre-shipment inspection except when such inspection is mandated by the authorities of the country of export.

Sellers (A 10); Buyers (B 10) Seller Buyer

CIF [Cost, Insurance, and Freight] (... named port of destination)

CIF means that the seller delivers when the goods pass the ship's rail in the port of shipment. The seller must pay the costs and freight necessary to bring the goods to the named port of destination BUT after the goods are delivered, the risk of loss of or damage to the goods are transferred from the seller to the buyer. In CIF the seller also has to procure marine insurance against the buyer's risk of loss of or damage to the goods during the carriage.

Seller: [Other obligations] Buyer:[Other obligations]

Rights and obligations of seller and buyer under CIF (Incoterms 2000) (Incoterms Sellers obligation (A 1): [To provide goods in conformity with the contract] The seller must provide the goods and the commercial invoice, in conformity with the contract. Buyers obligation (B 1): [Payment of the price] The buyer must pay the price as provided in the contract of sale

Sellers (A 2); Buyers (B 2) Seller Buyer Seller: [Export licenses and customs formalities] The seller must obtain at his own risk and expense export license and carry out all customs formalities necessary for the export of the goods. Buyer: [Import licenses and customs formalities] The buyer must obtain at his own risk and expense any import license, and carry out customs formalities for the import of the goods.

Sellers (A 3); Buyers (B 3) Seller Buyer Seller: [contract of carriage and insurance] a) Contract of carriage The seller must contract on usual terms at his own expense for the carriage of the goods to the named port of destination by the usual route in a seagoing vessel of the type normally used for the transport of goods of the contract description. b) Contract of insurance: No obligation (However, seller usually procure marine insurance against buyers risk of loss of or damage to goods.)

Sellers (A 3); Buyers (B 3) [Cont.] Seller Buyer

Buyer: [Contract of carriage and insurance] a) Contract of carriage No obligation b) Contract of insurance No obligation

Sellers (A 4); Buyers (B 4) Seller Buyer Seller: [Delivery] The seller must deliver the goods on board the vessel at the port of shipment on the date or within the agreed period. Buyer: [Taking delivery] The buyer must accept delivery of the goods when they have been delivered in accordance with A4 and receive them from the carrier at the named port of destination.

Sellers (A 5); Buyers (B 5) Seller Buyer Seller: [Transfer of risks] The seller must bear all risks of loss of or damage to the goods until such time as they have passed the ship's rail at the port of shipment. Buyer: [Transfer of risks] The buyer must bear all risks of loss of or damage to the goods from the time they have passed the ship's rail at the port of shipment.

Sellers (A 6); Buyers (B 6) Seller Buyer Seller: [division of costs] The seller must, subject to the provisions of B6. pay all costs relating to the goods until such time as they have been delivered in accordance with A4; the freight and all other costs, including the costs of loading the goods on board; the costs of insurance; and any charges for unloading at the agreed port of discharge which were for the seller's account under the contract of carriage.

Buyers (B 6) Buyer Buyer: [Division of costs] The buyer must pay: Buyer:

unloading costs including lighterage and wharfage charges, unless such were for the seller's account under the contract of carriage; and

Sellers (A 7); Buyers (B 7) Seller Buyer Seller: [Notice to buyer] Seller must give buyer sufficient notice that the goods have been delivered in order to allow buyer to take measures which are normally necessary to enable him to take the goods. Buyer: [Notice to seller] Buyer must, whenever he is entitled to determine the time for shipping the goods and/or the port of destination, give seller sufficient notice thereof.

Sellers (A 8) Seller Seller: [Proof of delivery, trans. document] Seller: The seller must, at his own expense, provide the buyer without delay with the usual transport document for the agreed port of destination. This document must cover the contract goods, be dated within the period agreed for shipment, enable the buyer to claim the goods from the carrier at the port of destination and, enable the buyer to sell the goods in transit by the transfer of the document to a subsequent buyer (the negotiable BL) or by notification to the carrier.

Buyers (A 8) Buyer

Sellers (A 9); Buyers (B 9) Seller Buyer

Buyer: [Proof of delivery, trans. document] The buyer must accept the transport document in accordance with A8 if it is in conformity with the contract.

Seller: [Checking, packaging, marking] (Same as in FOB) Buyer: [Inspection of goods] (Same as in FOB) Sellers (A 10); Buyers (B 10) Seller: [Other obligations] Buyer:[Other obligations]

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