Incoterms2000.doc

International Trade TermsTrade terms, also called price terms or delivery terms, are an important part of a unit price in international trade, standing for specific1 responsibilities and obligations2 of both the buyer and the seller. Trade terms usually indicate the place where the goods are delivered and the mode of transport used. They have the important function of naming the exact point at which the ownership of the goods is transferred from the seller to the buyer. The use of trade terms greatly simplifies3 contract negotiations, and thus saves time and cost.International Rules and Practices on Trade TermsTrade terms have been used in trade practices for many years. However, as different countries and merchants might have different interpretations of the terms problems then happened. In order to clear up the confusion, some international organizations made efforts to work out the uniform4 rules on trade terms. The following are three major international rules and practices on trade terms drawn up by different organizations.Warsaw-Oxford Rules 1932This rule was drafted by the Association of International Law in 1932. It contains 21 clauses, which only stipulate the nature of CIF contract, and the costs, risks and responsibilities which should be borne by both seller and buyer. Because it only includes one sort of trade term, its application5 is limited very much. More and more merchants discard6 it and turn to new rules with the development of international trade.Revised American Foreign Trade Definitions 1941 This rule was made out by nine American commercial organizations in 1941. It was a set of practices which were used frequently in US trade at that time. Nowadays, it is still used in North America although it had been published for more than sixty years. It contains six sorts of trade terms like EX, FOB, FAS, C&F, CIF and Ex Dock.Incoterms 2000Nowadays, Incoterms 2000 are the trade definitions most commonly used in international sales contracts. Revised and published by International Chamber of Commerce ( ICC ), it is at the heart of world trade today. It is a set of uniform rules or the interpretation of international commercial terms defining the costs, risks and obligations of buyers and sellers in international trade. Group EGroup E includes EXW which stands for “Ex Works. named place”. It means that the seller delivers when he places the goods at the disposal of7 the buyer not cleared for export8 and not loaded on any collecting vehicle, at the sellers premises9 or another named place (i. e. factory, warehouse10, etc.). This term thus means the minimum11 responsibilities and obligation for the seller, and the buyer has to bear all costs and risks involved in taking the goods from the sellers premises to the destination. However, if the parties wish the seller to be responsible for the loading of the goods on departure and to bear the risks and all the costs of such loading, this should be made clear in the sales contract. EXW should not be used when the buyer cannot clear for export directly or indirectly. Group FGroup F includes FCA (“Free Carrier. named place”), FAS (“Free Alongside Sd port of shipment”) and FOB (“Free on Board. named port of shipment”).FCA means that the seller delivers the goods, cleared for export, to the carrier nominated12 by the buyer at the named place on the agreed date. It should be noted that the chosen place of delivery has an impact13 on the obligations of loading and unloading the goods at that place. If delivery occurs at the sellers premises, the seller is responsible for loading. If delivery occurs at any other place, the seller fulfills his obligations after the arrival of the goods at the named place and is not responsible for unloading from his carrying vehicles. FAS means that the seller delivers when the goods are placed alongside the vessel named by the buyer 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. The FAS term requires the seller to clear the goods for export. FOB means that the seller delivers when the goods pass the ships rail nominated by the buyer 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 point. FOB requires the seller to clear the goods for export. If the seller does not want to deliver the goods across the ships rail, the FCA term should be used.Group CGroup C includes CFR (“Cost and Freight. named port of destination”) CIF (“Cost, Insurance and Freight. named port of destination”), CPT (“Carriage14 Paid to. named place of destination”) and CIP (“Carriage and Insurance Paid to. named place of destination”). It requires the seller to contract for carriage on usual terms at his own expense. Therefore, a point up to which he would have to pay transport costs must be indicated after “C”-terms. CFR and CIF mean that the seller delivers when the goods pass the ships rail in the port of shipment, while CPT and CIP mean that the seller delivers the goods to the carrier nominated by him. For “C”-terms, the seller must in addition pay the cost of carriage necessary to bring the goods to the named destination. Under the CIF and CIP terms, the seller also has to take out insurance and bear the insurance cost. Since the point for the division of costs is fixed at a point in the country of destination, the “C”-terms contracts are often mistakenly believed to be arrival contracts, in which the seller would bear all risks and costs until the goods have actually arrived at the agreed point. However, it must be noted that the “C”-terms are of the same nature as “F” terms because the seller fulfills the contract in the country of shipment. It is in the nature of shipment contracts that, while the seller is bound to15 pay the normal transport cost of the goods by a usual route and in a customary16 manner to the agreed place, the risk of loss of or damage to the goods, as well as additional costs resulting from events occurring after the goods having been properly delivered for carriage, fall upon the buyer. Hence, the “C”-terms are different from all other terms because they contain two “key” points, one indicating the point to which the seller is bound to arrange and bear the costs of carriage and another one for the allocation17 of risk. Group DGroup D includes DAF (“Delivered at Frontier18. named place”), DES (“Delivered Ex Ship. named port of destination”), DEQ (“Delivered Ex Quay19. named port of destination”), DDU (“Delivered Duty Unpaid. named place of destination”) and DDP (“Delivered Duty Paid. named place of destination”). The seller according to group D is responsible for the arrival of the goods at the agreed destination at the border or within the importing country. The seller must bear all risks and costs in bringing the goods thereto. Therefore, the “D”-terms mean arrival contracts, while the“F” and “C”-terms mean shipment contracts and the “E”-terms mean departure contracts. Under the “D”-terms except DDP the seller does not have to clear the goods for import. Some Points of Incoterms 2000First, Incoterms 2000 relate to only sales contract rather than contract of carriage. Second, although Incoterms 2000 are very important for the interpretation of sales contract, a great number of problems which may occur in implementing20 such a contract are not dealt with at all, for example, transfer of other property rights, settlements of breaches21 of contract, freedom from liability in certain situation, etc. Third, in practice, some parties may seek further precision22 about the terms by adding words in the contract, but Incoterms 2000 give no guidance to whatever for such additions. For example, there are no authoritative23 definitions of expressions such as “Liner Terms” and “Under tackle”.Fourth, there are only CIF and CIP that deal with insurance under Incoterms 2000. Under them, the seller should arrange insurance for the benefits of the buyer, but the buyer should note that the seller is required to obtain the insurance only on minimum cover. Under other terms, it is for the parties themselves to decide whether and to what extent they want to cover the goods. Generally, the party who bears the risks of losses of and the damages to the goods during transport according to the selected trade term, will arrange for the insurance for the benefits of himself.How to Select a Trade TermMany factors should be taken into consideration by the seller and the buyer when selecting a trade term. Mode of transport Some trade terms, for example, FAS, FOB, CFR, CIF, DES and DEQ under Incoterms 2000, are used only for sea and inland waterway transport while other trade terms under Incoterms 2000 can be applied to all modes of transport. It is very important to applying it to the mode of transport when selecting a trade term.Term of payment The term of payment, based on the will and ability of the buyer to pay for the goods, is also relative to the trade terms. For example, it is appropriate to select CIF if the term of payment agreed by the parties is documentary L/C but not appropriate to select DES. Because DES is a term indicating an arrival contract which means the seller is responsible for delivering the goods at the disposal of the buyer at the named port of destination. The buyer will not pay for the goods until that moment. Therefore, it will be senseless to apply the term of payment by L/C.Other factors There are also other factors to be considered when selecting a trade term such as the wills of the parties, the price acceptable, the time of shipment, the customs formalities24 in both countries, and possible risks of losses and damages to the goods during the transportation.There are several derived terms available to serve this purpose. FOB Under Tackle It means that the seller will deliver the goods beside the carrying vessel within the reach of the vessels tackle. The buyer shall bear the loading expense. FOB Liner Terms The ship will be responsible for loading. With these two terms, the buyer bears the loading cost since he is responsible for contracting and paying for carriage.FOB Stowed The seller is responsible for loading the goods on board the vessel and packing the goods carefully and closely in the vessels hold. FOB Trimmed Besides loading the goods on board the vessel, the seller should also trim the goods to make the vessel evenly balance. FOB Free In This is a combination of a sales term and a transport term. Free in means the carrying vessel is not responsible for loading the goods. The seller pays the loading cost under the above three terms.FOB term requires the seller to clear the goods for export. This term can only be used for sea or inland waterway transport. It is inappropriate when the seller is called upon to hand over the goods to a cargo terminal before the ship arrives since he should then have to bear the risks and the costs before the goods have passed over the ships rail when he is no longer able to control the goods or to give instructions with respect to their custody. When the ships rail serves no practical purpose, such as in the case of roll-on/roll-off or container traffic, the FCA is more appropriate to use.CIF CIF means that the seller must pay the costs and freight necessary to bring the goods to the named port of destination, and he has to procure marine insurance against the buyers risk of loss or damage to the goods during the carriage. The seller contracts for insurance and pays the insurance premium. But the buyer should note that under the CIF term the seller is only required to obtain insurance on the minimum coverage. This term requires the seller to clear the go