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1 Incoterms This guideline is also posted on the UNOPS intranet: Main Page Practices Procurement How to guides Organizational Effectiveness Centre 20 ecember 2006

2 Contents 1 WHAT ARE INCOTERMS WHAT O INCOTERMS SPECIY WHAT ARE THE IERENT INCOTERMS HOW TO CLASSIY THE INCOTERMS HOW TO USE INCOTERMS IN A CONTRACT INCOTERMS AN INSURANCE INCOTERMS AN LINER TERMS INCOTERMS AN PAYMENT OBLIGATIONS BETWEEN SELLER AN BUYER RECOMMENE INCOTERMS AN OTHER TIPS LESSONS LEARNE INCOTERMS 2000: TRANSPORT, OBLIGATIONS, COSTS AN RISKS GLOSSARY O INCOTERMS USE IN THIS GUIELINE What are Incoterms Logistics is defined as all the operations involved in moving from the time they are manufactured until they have been taken over by the end-user. Logistics relates to packing, storing, handling, transit, insurance, custom clearance, etc. or example when purchased for country B are manufactured in country A, moving the from the factory to final destination entails a series of logistics operations, ranging from: - Packing the - Export clearance - Transport from factory to country A port/airport - International transport - Transport from country B port/airport to final destination - Handling - Insurance during transport - Import clearance All these operations include costs, which must be paid either by the buyer or by the seller. In order to avoid misunderstanding and to reduce risks of costly disputes between the buyer and the seller, the ICC (International Chamber of Commerce) has developed a set of international and official rules for the interpretation of trade terms. These terms are called incoterms (International Commercial Terms). References to incoterms 2000 (the latest revision came into effect in 2000) in a sale contract define clearly the parties respective obligations and rights. The incoterms deal only with the relation between the seller and the buyer under the contract of sale. As such they do not apply to the contract of carriage (only the contract of sale). urthermore, they do not cover all aspects of the contract of sale, i.e. they do not provide for all the duties, which parties may wish to include in a contract of sale. The incoterms are a standard coded language understood by everyone involved in international trade: buyers, vendors, forwarders, carriers, custom officials, etc. 2

3 To purchase a handbook with detailed description on incoterms 2000, please see Information on the incoterms can be found at 2 What do incoterms specify The incoterms specify the seller and buyer s obligations in terms of: - Transfer of costs (i.e. from which point the costs will be borne by the buyer) - Transfer of risks (i.e. from which point the risks will be borne by the buyer) - ocuments (i.e. what are the documents to be provided by the vendor and the seller) However, the incoterms do not specify the transfer of property. Since their creation in 1936, the incoterms have been modified regularly in view of the development of the international trade and of the new transport techniques (containers, air transport, etc...). The latest version has applied since 01 January What are the different incoterms There are 13 different incoterms, each being a 3-letter acronym based on the English description (a summary is provided in the table at the end of this document): Incoterms escription EXW Ex Works CA ree Carrier AS ree Alongside Ship OB ree On Bord CR Cost and reight CPT Carriage Paid To CI Cost, Insurance, and reight CIP Carriage and Insurance Paid To A elivered At rontier ES elivered Ex Ship EQ elivered Ex Quay U elivered uty Unpaid P elivered uty Paid The incoterms define three basic elements: - Place: Where the seller delivers the to the buyer - : What the seller pays up to that point of delivery, unless otherwise agreed with the buyer - : When the seller passes the transit risk to the Buyer or each of the 13 incoterms, these 3 elements are defined as follows: EXW - Ex Works (named place) - Place: At the works or warehouse - : The seller packs for export and prepares for dispatch - : Transferred when the are at buyer s disposal 3

4 CA - ree Carrier (named place) - Place: At the place, and to the carrier, named by the buyer - : The seller pays up to the point of delivery of the and for export formalities - : Transferred when the seller delivers the at the named place AS - ree Alongside Ship (named shipment port) - Place: Alongside the ship, and at the shipment port, named by the buyer, or the lighter - : The seller pays for the delivery, export formalities, of the alongside the ship or in lighter - : Transferred when the seller delivers the alongside the ship OB - ree on Board (named shipment port) - Place: On board the ship at the main shipment port - : The seller pays for the delivery, export formalities and loading, of the over the ship s rail - : Transferred when the have passed the ship s rail at the shipment port CR - Cost and reight (named destination port) - Place: On board the ship at the point of shipment for transport to the named port - : The seller pays for all cost and freight, excluding unloading, import clearance and duties, to the named destination port - : Transferred when the have passed the ship s rail at the port of shipment CI - Cost, Insurance and reight (named destination port) - Place: On board the ship at the point of shipment for transport to the named port - : The seller pays for all costs and freight, including marine insurance but excluding unloading, import clearance and duties, to the named destination port - : Transferred when the have passed the ship s rail at the port of shipment CPT - Carriage Paid To (named destination place) - Place: At the first carrier or forwarder for transport to the agreed point at the named place - : The seller pays for all costs and freight, excluding unloading, import clearance and duties, to the named destination place - : Transferred when the have been handed over to the first carrier or forwarder CIP - Carriage and Insurance Paid (named destination place) - Place: At the first carrier or forwarder for transport to the agreed point at the named place - : The seller pays for all costs and freight, including marine insurance but excluding unloading, import clearance and duties, to the named destination place - : Transferred when the have been handed over to the first carrier or forwarder A - elivered At rontier (named place) - Place: At the named frontier place, cleared for export but not for import - : The seller pays for all costs and freight to the named frontier place excluding unloading, import clearance and duties - : Transferred when the are at buyer disposal ES - elivered Ex Ship (named destination port) - Place: On board the ship at the unloading point in the named port of destination - : The seller pays for all costs and freight, to the named destination port, excluding unloading, import clearance and duties - : Transferred when the are delivered to the named destination port, but still onboard the ship 4

5 EQ - elivered Ex Quay (named destination port) - Place: On the quay at the named destination port - : The seller pays for all costs and freight to the named destination port, including discharging on the quay but excluding import clearance and duties - : Transferred when the are unloaded at the named destination port U - elivered uty Unpaid (named destination place) - Place: At the named destination place - : The seller pays for all costs to the named destination place, excluding unloading, import clearance and duties - : Transferred when the are delivered to the named destination place P - elivered uty Paid (named destination place) - Place: At the named destination place - : The seller pays for all costs to the named destination place, including duties, taxes and import charges, but excluding unloading - : Transferred when the are delivered to the named destination place 4 How to classify the incoterms The incoterms can be classified in different ways: By ascending obligation for the seller: EXW, CA, AS, OB, CR, CPT, CI, CIP, A, ES, EQ, U, P. By group: Group E: EXW. Goods delivered in the seller s factory or premises. Group : CA, AS, OB. Main carriage not paid by the seller. Group C: CR, CPT, CI, CIP. Seller pays for the main carriage but does not bear the risks. Group : A, ES, EQ, U, P. Seller pays for the transport and bears the risks. Seller s obligation Group E (EXW) (CA, AS, OB) C (CR, CPT, CI, CIP) (A, ES, EQ, U, P) Buyer s obligation By mode of transport: Some incoterms can only be used for sea transport, for overland transport, or for any mode of transport. Sea transport only: AS, OB, CR, CI, ES, EQ All modes of transport: EXW, CA, CPT, CIP, A, U, P 5

6 Based on the place of transfer of risks: The risks are transferred to the buyer in the sellers country: EXW, CA, AS, OB, CR, CPT, CI, CIP. The risks during the main transport are borne by the buyer. The risks are transferred to the buyer in the final destination country: ES, EQ, U, P. The risks during the main transport are borne by the seller. The risks are transferred to the buyer neither in the seller s country nor in the final destination country: A. The risks are transferred to the buyer at the named frontier. 5 How to use incoterms in a contract In a contract the selected incoterm must be put before the place of delivery or of transfer of costs, e.g. OB Hamburg, Germany. It is also important to specify in the contract that the incoterm is a ICC incoterm to avoid potential confusion with for example the American incoterms (for the OB incoterm in particular), e.g. OB Hamburg, Germany (ICC 2000). It is recommended, in particular for non-english speaking buyers, not to translate the incoterm in the national language (for example avoid C& or CA etc.). The incoterms are flexible and as such the contracting parties may decide to use variants. or example CR landed if the parties decide that the seller should pay for the unloading of the or to include unloading costs in the sea freight, or P, VAT unpaid if the parties wish to exclude from the seller s obligations the value-added tax. However, the ICC gives a clear definition of the term of delivery for each incoterm but not for the variant. or the sake of clarity, it is suggested that the variant be written after the reference to incoterm, e.g. CR Abidjan, Ivory Coast (ICC 2000) landed. It is also important that the trading partners mutually agree of the exact meaning of the variant in order to avoid potential misinterpretation and dispute. 6 Incoterms and insurance UNOPS has signed a global marine cargo insurance and it is therefore recommended not to use the incoterms CI or CIP. However, if using the CI or CIP incoterm, the buyer must take special care to the distribution of responsibilities in case of damages during transport. Under the CI or CIP, the seller has to subscribe to a minimum insurance covering the CI or CIP value plus 10%. This may not be sufficient, i.e. all risks are not covered and the amount to be reimbursed in case of claim might be too low to fully cover a replacement. Therefore, the buyer must clearly specify the insurance coverage and the perils to be covered when using these 2 incoterms. or the perils not covered by the seller s insurance, the buyer might decide to subscribe to a separate insurance. 7 Incoterms and liner terms Incoterms only relate to trade terms used in the contract of sale, thus they do not deal with terms, which may be used, in specific contracts of carriage (terms of various charter parties). With the development of liner transport (transport organized on a regular basis between various seaports), cargo space can be booked directly with the shipping line or through an agent as the shipping line has a fixed sailing date (weekly, every two weeks, monthy, etc.) from each port they sail from. 6

7 Liner terms means that the ship owner bears the costs related to the cargo handling, including loading and landing. However this varies from country to country and from port to port within the same country, and the shipper usually has to pay some of these costs. The parts of the loading and landing costs which are to be borne by the ship owner and the shipper are defined in the liner terms. Therefore, the shipper must check carefully the liner terms, as liner terms depend on the sailing and destination ports. Whereas incoterms are the same regardless of the port, liner terms vary from port to port. 8 Incoterms and payment The main obligation of the buyer is to pay the price as provided in the contract of sale. The main obligation of the seller is to provide the and the commercial invoice together with the payment and shipping documents in conformity with the contract of sale. epending on the type of incoterm, the required documents may differ: Incoterm Group E C Payment and shipping document Invoice, Packing list, CR (orwarder Confirmation of receipt), Invoice, Packing list, CR Invoice, Packing list, B/L (Bill of lading, Airwaybill, or Waybill) marked with reight prepaid Invoice, Packing list, B/L, elivery receipt 9 Obligations between seller and buyer Obligations E X W C A A S O B C R C P T C I C I P A E S E Q U P Loading at seller s premises B S S S S S S S S S S S S omestic precarriage/local cartage B S S S S S S S S S S S S Trade documentation in country of exportation B S S S S S S S S S S S S Customs clearance in country of exportation B S S S S S S S S S S S S Export charges B S S S S S S S S S S S S Transport (Cargo) Insurance S S International main carriage B B B B S S S S S S S S S Unloading at terminal (not Buyer s premises) from arriving mean of B B B B B S B S S B S S S transport* Trade documentation in country of transit/importation B B B B B B B B B B B B S Customs clearance in country of importation B B B B B B B B B B B B S Import charges 7

8 Local cartage/omestic on-carriage* Unloading at buyer s premises B B B B B B B B B B B S B B B B B B B B B B B B S B S B B B S S B B B B B B B *: or CPT, CIP, U, and P, it is assumed that delivery takes place at buyer s premises, which is not the named terminal 10 Recommended incoterms and other tips Recommended incoterms: CA: Considering that UNOPS has joined the long term arrangement for freight with Kühne & Nagel on the assumption that UNOPS would use this freight forwarder for its shipments if proven cost effective and practical, the recommendation in such case would be to use the incoterm CA (ree carrier, named place). CA should be preferred to EXW as this resolves the problem of loading inside the seller s premises or export clearance for the buyer. CA should also be preferred to OB or AS as with the CA incoterms full shipment from port of loading will be under the responsibility of only one entity: the freight forwarder (Kühne and Nagel). CR/CPT: If the choice is for the supplier of the to take care of the freight as well, one should use CR if the are to be shipped to a port or CPT if they are to be shipped to a named point. CR/CPT should be preferred to CIP, CI and to the incoterms of the family considering that UNOPS has signed a global cargo insurance contract providing an exceptional overall coverage. U: or small local purchase orders not requiring import of it is recommended to use U. TIPS: The use of the incoterms in a contract is not an obligation. However, it is highly recommended to use them as they are internationally used and understood by those involved in international trade. Using the incoterms reduces the risks of costly disputes. Be careful to use the right incoterm, i.e. do not use a sea transport incoterm for overland transport. Be careful when using variants in view of the associated risks. Specify ICC together with the selected incoterm to avoid confusion with other existing incoterms. o not translate the incoterm. When liner terms are used, check carefully the liner terms, in particular the distribution of loading and landing costs between the ship owner and the shipper. 11 Lessons learned Incoterms of the group are often considered an easy way to transfer risks to the supplier. Although the supplier has additional responsibilities, the buyer must not assume that this is a solution for eliminating his risks. Below are two examples of problems resolving from purchased under U Terms: 8

9 Example 1: A tender for a shipload of cement requested firms to quote both CR port of discharge & U Customs Warehouse. The lowest offer did not show a significant price difference between the two terms, even though under U the supplier was undertaking additional costs & substantial financial risks. The supplier was requested to confirm that their price was U Customs Warehouse as requested. Such a quote defines that they are required to cover all costs to the warehouse. This was confirmed, and the buyer decided to take advantage of their offer, even though there was a doubt that the supplier really understood their obligations. Unfortunately almost everything that might go wrong, did go wrong: - The ship arrived late, and was blocked 2 weeks in the port, waiting for a berth, as food items had to be discharged. This resulted in the shipping company invoicing the supplier for demurrage. - The discharge was slowed down due to heavy rains, resulting in additional demurrage. - uring discharge, one of the holds got stuck and couldn t be closed during heavy rains, resulting in water damage to a large quantity of cement. - ue to the supplier s lateness in shipping, they did not load the cement into 1.5 ton big-bags as required, planning on doing this in the port of arrival. Unfortunately, this required additional labour, and was subject to additional taxes by the Port Authority. - The supplier claimed that these additional costs, which amounted to over $60,000, were to the account of the buyer. This was contested, pointing out the supplier s obligations under U deliveries. After many months of negotiations between the legal department & the supplier, a compromise was reached whereby the costs were split between the buyer & supplier, as the Legal epartment felt this was less costly than going to arbitration. Lesson learned: If in doubt that a supplier fully understands their financial risks, be sure these are clarified before contracting. Example 2: An order for industrial chemicals was issued to a manufacturer for delivery U to a land-locked country. The were travelling by sea to a West African port, and inland by rail. Payment terms required the consignee to confirm good receipt. The delivery note mentioned some damaged drums, and these were deducted from the invoice, which was paid. A short while later, it was discovered that an error was made on the correct quantity of damaged drums. The supplier was contacted, supplied with a Lloyds Agent s Survey Report & relevant claim documentation against the railroad, and requested to reimburse for the damaged. The supplier contested the report & refused to reimburse. After almost one year of negotiations, including exclusion of the manufacturer from shortlists and refusal to purchase any of their products from trading firms, the firm accepted to reimburse for the losses Lesson learned: When purchasing under U Terms, understand that errors may be made in the field when confirming good receipt. When are delivered to another part of the world it is extremely difficult to be 100% certain that all of the have arrived in good condition & there will not be an insurance claim later. This risk should therefore be taken into consideration when choosing to purchase U. 9

10 12 Incoterms 2000: Transport, obligations, costs and risks Symbol Type (*) Seller Exp Clearance Carrier Imp Clearance Buyer Comments EXW M Carriage of Carriage arranged by the buyer Risk transfer to the buyer once are at buyer disposal Cost transfer to the buyer once are at buyer disposal CA M Carriage of AS S Carriage of OB S Carriage of CR S Carriage of CI S Carriage of CPT M Carriage of CIP M Carriage of A O Carriage of Carriage arranged by the buyer Risk transfer to the buyer once delivered to carrier Cost transfer to the buyer once delivered to carrier Carriage arranged by the buyer Risk transfer to the buyer once placed alongside the ship Cost transfer to the buyer once placed alongside the ship Carriage arranged by the buyer Risk transfer to the buyer once have passed ship s rail Cost transfer to the buyer once have passed ship s rail Carriage arranged by the seller Risk transfer to the buyer once have passed ship s rail Cost transfer to the buyer at port of destination Carriage and insurance arranged by the seller Risk transfer to the buyer once have passed ship s rail Cost transfer to the buyer at port of destination Carriage arranged by the seller Risk transfer to the buyer once delivered to carrier Cost transfer to the buyer at place of destination Carriage and insurance arranged by the seller Risk transfer to the buyer once delivered to carrier Cost transfer to the buyer at place of destination Carriage arranged by the seller 10

11 ES S Carriage of EQ S Carriage of U M Carriage of P M Carriage of * M: Multimodal, S: Sea, O: Overland Risk transfer to the buyer once delivered at frontier Cost transfer to the buyer once delivered at frontier Carriage arranged by the seller Risk transfer to the buyer once placed on board the ship Cost transfer to the buyer once placed on board the ship Carriage arranged by the seller Risk transfer to the buyer once placed on the quay Cost transfer to the buyer once placed on the quay Carriage arranged by the seller Risk transfer to the buyer once placed at buyer disposal Cost transfer to the buyer once placed at buyer disposal Carriage and import clearance arranged by the seller Risk transfer to the buyer once placed at buyer s disposal Cost transfer to the buyer once placed at buyer s disposal 13 Glossary of incoterms used in this guideline Airway Bill: ocument similar to a bill of lading but utilized for the transport of merchandise by airfreight. It shows the title of ownership and the details of being air freighted Bill of Lading (BL): ocument issued by a ship owner to a shipper of. It serves as a receipt for the (description and quantity, suitable notations), evidence of the contract of carriage (terms and conditions of the contract or reference to a charter party if applicable) and document of title (to take delivery of the from the ship) Carriage: The act of carrying, transporting, or conveying Carrier: Individual, partnership, or corporation that transports for compensation Cartage: The act of carrying or conveying in a cart. Charter party: ocument containing all the terms and conditions of the contract between a ship owner and a charterer, and signed by both parties or their agents, for the hire of a ship or the space in a ship Charterer: Person or company who hires a ship from a ship owner for a period of time or who reserves the entire cargo space of a ship for the carriage of from a port of loading to a port of discharge Clearance: ormality needed to obtain authorization from the customs to allow a ship to leave a port or to permit her to discharge her cargo orwarder: irm engaged in arranging to forward parcels of cargo by sea, land or air from one place to another on behalf of its clients Handling: The act of loading, unloading, or moving cargoes 11

12 Hold: Space below the deck of a ship used to carry cargo Incoterms: International Commercial Terms Lighter: Type of barge used to carry to a port part of the cargo of an ocean ship (e.g. when the draught of the ship is too deep to reach the port) Liner Terms: Qualification to a freight rate which means that it consists of the ocean carriage and the cost of cargo handling at the loading and discharging ports according to the custom of those ports. This varies widely from country to country and, within countries, from port to port (in some ports the freight excludes all cargo handling costs while in others the cost of handling between the hold and the ship s rail or quay is included) Multimodal transportation: reight movement involving more than one mode of transportation (ground, air, rail, ocean). (Multimodal is also called Intermodal) Negotiable documents: ocuments, which legally transfer the right of property from one or more persons to others Ship owner: Person or firm that owns one or more ships Shipper: Person or firm who enters into a contract with a shipping line or ship owner for the carriage of Ship s rail: Side of a ship Transit: Conveying of from the port of departure to the port of arrival Waybill: ocument issued by a shipping line to a shipper, which serves as a receipt for the and evidence of the contract of carriage. It resembles a bill of lading, but unlike a B/L, it is not a document of title; it bears the name of the consignee who has only to identify himself to in order to take delivery of the cargo. The purpose of the waybill is to avoid the delays to cargoes, which occur when bills of lading are late in arriving at the discharge port 12

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