By Scott R. Lowden, International Trade attorney
Author, Import Transactions and Customs Compliance
In the United States, shipping terms used in domestic commerce are usually governed and defined by the Uniform Commercial Code (UCC) as enacted in each of the individual states. Other domestic shipping terms published by the National Motor Freight Traffic Association are sometimes adopted, primarily in transactions with carriers. The UCC terms are currently in a state of change. At the time of this writing the American Law Institute and the National Conference of Commissioners on Uniform State Laws deleted shipping terms from their latest draft of the model code. No substitutes were recommended. If states follow the recommendations of these two drafting bodies and adopt codes that leave out uniform shipping terms, domestic buyers and sellers may be destined to rely on each state’s common law interpretation of “FOB” or “CIF” or other favored domestic terms. Or they will substitute contractual terms in their terms and conditions of purchase that define the terms of shipment without the use of the venerable shorthand terms. The latter may be the best result.
In any case the UCC terms currently used in domestic transactions are inadequate for international transactions because they fail to address basic and essential provisions that must be addressed in international trade. States of the United States do not have customs regulations and most states do not have to deal with international security issues in the course of interstate commerce. Insurance issues in domestic trade are not normally affected by international maritime rules or treaties. UCC terms only govern the passage of title and risk of loss and allocate freight costs between parties. They are silent as to legal responsibilities of the parties for export clearance, import clearance, payment of import duties, purchase of cargo insurance and the nuances of pre-carriage obligations (e.g. truck-to-air terminal in the exporter’s country) and main carriage (e.g. air carrier-to-named destination in the U.S.).
As an importer, your shipping terms should be defined by reference to the Incoterms. (Incoterms is a registered trademark of the International Chamber of Commerce.) Recognized and used by exporters in almost every trading country in the world, the Incoterms state the key responsibilities of the exporter and importer in connection with the shipment of goods in traditional international transactions. Incoterms are shipping terms drafted by the International Chamber of Commerce (ICC). They have customarily been updated, revised and published by the ICC every ten years. The latest version was published in 2010 (Incoterms 2010 (ISBN 978-92-842-0080), ICC No. 720, ICC Publishing S.A., Paris, France, available from ICC Publishing Inc., New York, NY, hereafter “Incoterms 2010”) and took effect January 1, 2011. The Incoterms provide a valuable form of shorthand expressed in acronyms such as “FCA” or “DDP”, to reflect a variety of responsibilities for transporting, insuring, exporting and importing your products. Appropriate Incoterms should be negotiated with your suppliers and included as part of the terms and conditions of your purchase order. As you will see, each Incoterm requires the parties to identify the physical location at which specified responsibilities shift from seller to buyer. The locations should be very specific to avoid double payment of handling charges and gaps in the assumption of risk. Obligations such as packaging and insurance coverage are not described sufficiently by the Incoterms and need further elaboration in your purchase order terms.
Incoterms 2010 revises Incoterms 2000 by eliminating the DAF, DES, DEQ AND DDU terms and adding two new terms as replacements, DAT and DAP. In addition to updating the international terms, the drafters were seeking to make Incoterms 2010 attractive as a replacement for domestic shipping terms currently in use in countries such as the United States. For that reason they may have retained the “waterborne terms”, discussed below, beyond their useful life. It may be a little early for you to take their advice and use Incoterms 2010 for your domestic shipments. Commercial habits change slowly and no attempt has been made to adapt state commercial codes and local common law and practice to conform to Incoterms 2010.
Key operating provisions of each of the eleven terms defined in Incoterms 2010 are summarized below as they are typically used in practice. They are organized as the ICC presents them with the first seven terms representing terms applicable to all modes of transport and the last four terms restricted to sea and inland water transport. These are summaries of the terms. Before selecting an Incoterm, you should refer to the full text of the Incoterms published by the ICC. Any of the Incoterms can be modified by the express written provisions of a purchase order or other contract of sale between the buyer and seller.
Terms for All Modes of Transport (Multimodal)
Ex Works (EXW). Seller places the goods, at the disposal of buyer at an agreed point, normally seller’s facility and gives buyer any notice necessary to enable buyer to take delivery of the goods.
Buyer is responsible for (i) loading, carriage and risk of loss of the goods (“risk of loss of the goods” includes any loss of, or damage to, the goods.) from seller’s designated facility to the destination, (ii) providing sufficient notice to seller of any information known to buyer that is necessary for seller to comply with any of buyer’s contractual timing and point of delivery requirements, (iii) providing seller with a receipt or other appropriate evidence of having taken delivery, (iv) compliance with export clearance requirements on the seller’s side and (v) compliance with import clearance requirements on buyer’s side. (Seller’s side is country of export. Buyer’s side is country of import.)
Insurance is arranged separately, usually by the buyer. “Ex-works” is not attractive for many importers because of the obligations placed on the importer to provide for inland transportation and export clearance from a foreign country. However, if your connections in the exporter’s country are highly reliable or under your control (e.g. in the case of exports from a foreign affiliate) the term allows you to control delivery through the entire supply chain.
Free Carrier (FCA). The parties (buyer and seller) can name (i) the seller’s facility (e.g. “FCA Seller’s Facility at [address]”) or (ii) the main carrier’s terminal on seller’s side (e.g. “FCA Container Terminal Tollerort, Port of Hamburg, Germany”) or (iii) another named place (including address and loading point) on the seller’s side, such as the forwarder’s warehouse. The “main carrier” is the primary (long-haul) carrier of the goods to the destination, usually an ocean going vessel or aircraft. Pre-carriage means transportation from the seller’s facility to the main carrier.
If the parties name seller’s facility, seller is responsible for loading the goods onto the first carrier and buyer is responsible for carriage and risk of loss of the goods thereafter. If the parties name the terminal of the main carrier, or if seller agrees separately with buyer to deliver the goods FCA another named place on the seller’s side, seller is responsible for delivery of the goods to the terminal or the named place and buyer is responsible for unloading the goods from the last pre-carrier and for the carriage and risk of loss of the goods thereafter.
Seller is responsible for (i) providing sufficient notice to buyer of delivery (or any failure to take delivery), (ii) providing the usual proof of delivery of the goods as contracted (e.g. an inland bill of lading) and (iii) compliance with export clearance requirements on the seller’s side.
Buyer is responsible for (i) providing sufficient notice to seller of the name of the carrier or other receiving party, the mode of transport, the time scheduled for delivery and identification of any delivery point within the named place and (ii) compliance with import clearance requirements on buyer’s side.
Insurance is arranged separately, usually by the buyer.
Carriage Paid To (CPT). The parties name the place on the buyer’s side (“stipulated destination”) to which the freight is prepaid by seller (e.g. “CPT Buyer’s Facility at [address]”). Parties must agree separately to the point of delivery, or passage of risk of loss, of the goods from seller to buyer on the seller’s side. If there is no separate agreement as to the point of delivery and no established practice of delivery, seller can deliver the goods to a point that best suits its purpose. Don’t let that happen.
Seller is responsible for (i) all costs of loading and carriage to the stipulated destination, (ii) the risk of loss of the goods until the goods are handed over to buyer in accordance with the agreed delivery terms, (iii) if it is customary or buyer requests it, providing buyer with the appropriate transport documents (e.g. bill of lading or air waybill) to enable buyer to take delivery, (iv) providing notice to buyer of delivery and any other information known to seller that is necessary for buyer take the goods and (v) compliance with export clearance requirements on the seller’s side.
Buyer is responsible for (i) all costs relating to the goods after delivery by seller other than the carriage costs to be paid by seller, (ii) any costs of unloading at the stipulated destination, unless included in the carriage costs to be paid by seller, (iii) the risk of loss of the goods after the goods have been delivered by seller, (iv) providing sufficient notice to seller of any information known to buyer that is necessary for seller to comply with any of buyer’s contractual timing and point of delivery requirements and (v) compliance with import clearance requirements on the buyer’s side.
Insurance is arranged separately, usually by the buyer.
Carriage and Insurance Paid (CIP). The parties name the place on the buyer’s side (“stipulated destination”) to which the freight is prepaid by seller (e.g. “CIP Buyer’s Facility at [address]”). Parties must agree separately in the purchase order terms to the point of delivery, or passage of risk of loss, of the goods from seller to buyer on the seller’s side. If there is no separate agreement as to the point of delivery and no established practice of delivery, seller can deliver the goods to a point that best suits its purpose. Don’t let that happen.
Seller is responsible for (i) all costs of loading and carriage to the stipulated destination, (ii) providing cargo insurance (described below) from the agreed point of delivery to the stipulated destination, (iii) the risk of loss of the goods until the goods are handed over to buyer in accordance with the agreed delivery terms, (iv) if it is customary or buyer requests it, providing buyer with the appropriate transport documents (e.g. bill of lading or air waybill) to enable buyer to take delivery, (v) providing notice to buyer of delivery and any other information known to seller that is necessary for buyer take the goods and (vi) compliance with export clearance requirements on the seller’s side.
Buyer is responsible for (i) all costs relating to the goods after delivery by seller other than the carriage costs and insurance to be paid by seller, (ii) any costs of unloading at the stipulated destination, unless included in the carriage costs to be paid by seller, (iii) the risk of loss of the goods after the goods have been delivered by seller, (iv) providing sufficient notice to seller of any information known to buyer that is necessary for seller to comply with any of buyer’s contractual timing and point of delivery requirements and (v) compliance with import clearance requirements on the buyer’s side.
Under the CIP Incoterm seller is required to obtain “minimum cover” cargo insurance from the agreed point of delivery to the stipulated destination with a reputable insurance company covering not less than 110% of the contract price in the currency payable for the goods as specified in the purchase order. The policy must entitle buyer or anyone else with an insurable interest to claim directly from the insurer. Minimum cover insurance is probably insufficient and scope of coverage should be discussed with your insurance carrier.
Delivered at Terminal (DAT). The parties name a terminal, or a named point within the terminal, where appropriate, on the buyer’s side to which the goods are delivered (e.g. “DAT Turning Basin Terminal, Wharf 32, Port of Houston Texas, U.S.A.”).
Seller is responsible for (i) all costs of carriage and unloading of the goods at the named terminal (or named point within the terminal) on the buyer’s side, (ii) the risk of loss of the goods until unloading at the named point is completed, (iii) providing buyer with the appropriate transport or other documents to enable buyer to take delivery, (iv) providing notice to buyer of any information known to seller that is necessary for buyer to take delivery of the goods and (v) compliance with export clearance requirements on the seller’s side.
Buyer is responsible for (i) providing sufficient notice to seller of any information known to buyer that is necessary for seller to comply with any of buyer’s contractual timing and point of delivery requirements, (ii) the risk of loss of the goods after unloading at the named point at the terminal, and (iii) compliance with import clearance requirements on buyer’s side.
Insurance is arranged separately, usually by the seller.
Delivered At Place (DAP). The parties name the place on the buyer’s side (stipulated destination) to which the goods are delivered (e.g. “DAP Buyer’s Bonded Warehouse at [address]”).
Seller is responsible for (i) all costs of carriage to the stipulated destination, (ii) the risk of loss of the goods until the goods are delivered ready for unloading by buyer at the stipulated destination, (iii) providing buyer with the appropriate transport or other documents to enable buyer to take delivery, (iv) providing notice to buyer of any information known to seller that is necessary for buyer to take delivery of the goods and (v) compliance with export clearance requirements on the seller’s side.
Buyer is responsible for (i) providing sufficient notice to seller of any information known to buyer that is necessary for seller to comply with any of buyer’s contractual timing and point of delivery requirements, (ii) the risk of loss of the goods upon completion of delivery by seller ready for unloading at the stipulated destination and (iii) compliance with import clearance requirements on buyer’s side. If the parties name a destination that requires entry of the goods into U.S. commerce, they will need to consider whether or not seller should be made responsible contractually for U.S. customs clearance.
Insurance is arranged separately, usually by the seller.
Delivered Duty Paid (DDP). The parties name the place on the buyer’s side (“stipulated destination”) to which the goods are delivered (e.g. “DDP Buyer’s Facility at [address]”).
Seller is responsible for (i) all costs of carriage to the stipulated destination, (ii) the risk of loss of the goods until the goods are delivered ready for unloading by buyer at the stipulated destination, (iii) providing buyer with the appropriate transport or other documents to enable buyer to take delivery, (iv) providing notice to buyer of any information known to seller that is necessary for buyer to take delivery of the goods, (v) compliance with export clearance requirements on the seller’s side and (vi) compliance with import clearance requirements on buyer’s side.
Buyer is responsible for (i) providing sufficient notice to seller of any information known to buyer that is necessary for seller to comply with any of buyer’s contractual timing and point of delivery requirements and (ii) the risk of loss of the goods upon completion of delivery by seller ready for unloading by buyer at the stipulated destination. It is common for importers to assume that if they can induce their supplier to sell them goods “DDP” they benefit by avoiding all risk and responsibility for delivery all the way to their doorstep. The other side of the coin is that the seller, as the exporter and the importer of record, will control the entire transaction governing the movement of the goods, using its own contracted forwarder, carrier and broker and possibly making determinations as to the classification and valuation of the imported goods and the duties payable upon entry.
Insurance is arranged separately, usually by the seller.
Terms for Water Transport (Waterborne)
Free Along Side (FAS). The parties name the main carrier’s terminal on seller’s side (e.g. “FAS Vessel, Savonetta Pier 111, Point Lisas, Trinidad and Tobago”).
Seller is responsible for (i) pre-carriage and risk of loss of the goods until the goods are delivered to the port of the main carrier (which can only be a water transport vessel) at a named loading point alongside the vessel specified by buyer, (ii) providing sufficient notice to buyer of delivery (or any failure to take delivery), (iii) providing transport documents or other customary proof of delivery of the goods to buyer as contracted and (iv) compliance with export clearance requirements on the seller’s side.
Buyer is responsible for (i) providing sufficient notice to seller of the name of the vessel, the loading point and the selected delivery time, (ii) loading the goods on board the vessel, (iii) costs of carriage from the named loading point, (iv) the risk of loss of the goods after delivery by seller at the named loading point and (v) compliance with import clearance requirements on buyer’s side.
Insurance is arranged separately, usually by the buyer.
The FAS Incoterm is not appropriate for container shipments, which are delivered to a terminal.
Free On Board (FOB). The parties name the main carrier’s terminal on seller’s side (e.g. “FOB Vessel, Savonetta Pier 111, Point Lisas, Trinidad and Tobago”).
Seller is responsible for (i) pre-carriage and risk of loss of the goods until the goods are delivered to the port of the main carrier (which can only be a water transport vessel) and placed on board the vessel named by buyer, (ii) providing sufficient notice to buyer of delivery (or any failure to take delivery), (iii) providing transport documents or other proof of delivery of the goods as contracted and (iv) compliance with export clearance requirements on the seller’s side.
Buyer is responsible for (i) providing sufficient notice to seller of the name of the vessel, the loading point and the selected delivery time, (ii) costs of carriage and the risk of loss of the goods after the goods have been placed by seller on board the vessel and (iii) compliance with import clearance requirements on buyer’s side.
Insurance is arranged separately, usually by the buyer.
The FOB Incoterm is not appropriate for container shipments or for other arrangements in which goods are delivered to a terminal without provision for loading them onto the vessel.
Cost and Freight (CFR). The parties name the port on the buyer’s side or any point at that port (“stipulated port destination”) to which the freight is prepaid by seller (e.g. “CFR Turning Basin Terminal, Wharf 32, Port of Houston Texas, U.S.A.”).
Seller is responsible for (i) all costs of carriage to the stipulated port destination, (ii) risk of loss of the goods until the goods are delivered to the port of the main carrier (which can only be a water transport vessel) and placed on board the vessel, (iii) providing buyer with the usual transport documents to the stipulated port destination, (iv) providing any notice to buyer that is necessary for buyer take the goods and (v) compliance with export clearance requirements on the seller’s side.
Buyer is responsible for (i) all costs relating to the goods after loading aboard the vessel other than the main carriage costs to be paid by seller, (ii) any costs of unloading, lighterage and wharfage at the stipulated destination on the buyer’s side, unless included in the main carriage costs to be paid by seller, (iii) the risk of loss of the goods after the goods have been loaded by seller on board the vessel and (iv) compliance with import clearance requirements on buyer’s side.
Insurance is arranged separately, usually by the buyer.
The CFR Incoterm is not appropriate for container shipments or for other arrangements in which goods are delivered to a terminal without provision for loading them onto the vessel.
Cost, Insurance and Freight (CIF). The parties name the port on the buyer’s side or any point at that port (“stipulated port destination”) to which the freight is prepaid by seller (e.g. “CIF Turning Basin Terminal, Wharf 32, Port of Houston Texas, U.S.A.”).
Seller is responsible for (i) all costs of carriage to the stipulated port destination, (ii) risk of loss of the goods until the goods are delivered to the port of the main carrier (which can only be a water transport vessel) and placed on board the vessel, (iii) providing cargo insurance (described below) from the point of delivery on board the vessel to the stipulated port destination, (iv) providing buyer with the usual transport documents to the stipulated port destination, (v) providing any notice to buyer that is necessary for buyer take the goods and (vi) compliance with export clearance requirements on the seller’s side.
Buyer is responsible for (i) all costs relating to the goods after loading aboard the vessel other than the main carriage costs and insurance to be paid by seller, (ii) any costs of unloading, lighterage and wharfage at the stipulated destination on the buyer’s side, unless included in the main carriage costs to be paid by seller, (iii) the risk of loss of the goods after the goods have been loaded by seller on board the vessel and (iv) compliance with import clearance requirements on buyer’s side.
Under the CIF Incoterm seller is required to obtain “minimum cover” cargo insurance from the agreed point of delivery to the named place of destination with a reputable insurance company covering not less than 110% of the contract price in the currency payable for the goods as specified in the purchase order. The policy must entitle buyer or anyone else with an insurable interest to claim directly from the insurer. Minimum cover insurance is probably insufficient and scope of coverage should be discussed with your insurance carrier.
The CIF Incoterm is not appropriate for container shipments or for other arrangements in which goods are delivered to a terminal without provision for loading them onto the vessel.
“FAS”, “FOB”, “CFR” and “CIF” are now known as “waterborne” terms because Incoterms 2010 defines them as applicable only to sea and inland waterway shipments. The waterborne terms seem to have been retained by the Incoterms 2010 drafters in order to make the Incoterms more acceptable for use in internal commerce in countries where these terms are more familiar, particularly the United States. Yet retaining them can create confusion because the four waterborne Incoterms often conflict with the terms by the same name as they are defined under applicable commercial codes, such as those in the United States. For example, if your contract boilerplate incorporates local law as the law of the purchase order contract and the face page of your purchase order specifies one of the waterborne terms (e.g. everybody’s favorite, “FOB”) without specifying Incoterms 2010 as the defining authority, you could be surprised to find that no one has responsibility for export clearance or import clearance because these responsibilities would have been covered by Incoterms, but are not covered by the shipping term as it is defined by applicable local law. As another example, if an unwary importer agrees to buy his goods “FOB seller’s facility per Incoterms 2010”, the terms would create an inherent conflict. “FOB” as defined by Incoterms 2010 would require the seller to pay for pre-carriage to the ocean carrier. So the seller might reasonably believe he needs to pay the local carrier when he shows up to take the goods to the ship. The seller then adds the local transportation cost to the importer’s bill. Yet the unwary importer, believing his shipping responsibility begins at the “seller’s facility” may already have arranged and paid for local transportation, thereby incurring the cost twice.
Compared to the confusion they can create, the four waterborne terms do not seem to provide advantages for international shipments that are not already offered by the seven multimodal terms of Incoterms 2010. The ICC has clearly demoted them and should probably have stuck a fork in them altogether.
Incoterms are necessarily incomplete in their coverage of the terms of shipment and delivery because there are too many variables inherent in individual transactions. Some of the most common transportation issues that will require separate provisions in your terms and conditions of purchase include (i) transfer (identification of the precise location of responsibility for carriage and the transfer of risk of loss), (ii) appropriate insurance coverage and (iii) packaging.
In most cases an importer will specify the same Incoterm in all of its purchase orders. The initial selection of the Incoterm should be reviewed by the attorney drafting the general terms and conditions of the purchase order. Thereafter, any proposed change in the Incoterm by purchasing personnel should prompt a review by the attorney because each Incoterm could require a modification of related purchase order terms.
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This article, “Using International Shipping Terms“, is reproduced and adapted from the book Import Transactions and Customs Compliance by Scott R. Lowden. Copyright © 2013 by FTA Publications LLC. Reprinted by permission of FTA Publications LLC. The article does not constitute legal advice from the author. For information about the book or the author, you may visit the author’s webpage at www.lowdentradelaw.com or contact the author directly at scott@lowdentradelaw.com.