Introduction
Definition of trade: exchanging products and/or services against payment.
- Goal: import products from other countries and make money by doing
so
1. Incoterms 2020
1.1 The necessity of international rules
Commercial contracts are made between sellers and buyers.
- Seller must deliver
- Buyer must pay
If they do not make any arrangements the legal rules of the country
governing the contract apply.
As a result of commercial contracts there will be costs, risks and tasks that
need to be divided between sellers and buyers
Incoterms (international commercial terms) help sellers and buyers
divide them in a clear and uniform manner
Incoterms are published by the ICC (international chamber of commerce)
- Main goal of the ICC: facilitating worldwide trade by assisting
companies with export and import
They also provide documents such as certificates of origin
How do seller and buyer come to a commercial agreement/contract?
1. Negotiation between seller and buyer
- Seller wants to attract as many new customers as possible
- Buyer wants to make the best deal
Buyer will demand offers from multiple sellers
Sellers will send an offer and set the prize
Buyer will confirm the offer he likes the best
2. Buyer and seller agree -> commercial agreement
- Buyer and seller will now discuss further to divide the costs, risks, and
tasks to come to a commercial contract.
Usage of the incoterms: buyer and seller can easily divide tasks,
risks and costs by choosing an appropriate incoterm (this step
provides clarity and uniformity to both parties)
Commercial relevance of incoterms:
- The cost of the trade for each party is determined by the chosen
incoterm
Sellers might offer a lower prize if the buyer takes more
responsibility through the chosen incoterm (f.e. buyer will pay for
the shipment and organize the shipment)
Operational relevance of incoterms:
- Once you agree to a specific incoterm, you agree to take on the risks
and costs, but also the tasks. You must complete these tasks or you
would be breaching your contract.
Whenever you agree to an incoterm it’s important to know very
well what you are agreeing to exactly. What tasks, risks and costs
will you (or your company) have?
, What costs/tasks can be the result of a commercial contract?
- Transport
- Loading/unloading/handling
- Storage
- Checking/Packaging/marking/weighing/measuring
- Insurance
- Customs formalities
Always depend on the specific commercial agreement
What risks can be the result of a commercial contract?
Who is responsible in case of damage or loss?
- We can determine 6 categories:
o Product – Industrial: Packing/conditioning/fire/combustion
o Commercial: theft/non-arrival/disappearance
o Legal
o Political - Public – Economical: Malicious
damage/vandalism/piracy
o Transport:
Manipulation/loading/discharge/stuffing/transhipment/Jettison
(goods falling overboard) /Washing (water damage)
overboard/accidents/catastrophes/fire/combustion
o Geophysical: accidents/catastrophes
Damaged goods: if the goods are damaged the buyer might refuse
the shipment
First set of incoterms: 1936
- FAS, FOB, C&F, CIF, Ex Ship and Ex Quay
Every 10 years the incoterms are revised to adjust to the
development of trade, geopolitical complications, different modes
of transport and different types of cargo.
Current incoterms: 2020
- 11 trade terms
1.2 The Incoterms 2020
Buyer and seller are always free to refer to previous incoterms (if they both
agree to this and know the consequences)
Important: incoterms are always an agreement between buyer and seller,
if a local law implicates the use of said incoterm, the law must be followed
because it hold more power than the agreement between seller and the
law.
Incoterms are only officially applicable if they are mentioned in the
commercial contract between seller and buyers, if not the
agreement of the incoterm holds no power.
How to refer to Incoterms?
, We make sure to refer to the version because each version has
updates and we want to make it clear which set of rules we’re
referring to
What factors influence the decision of the incoterm?
- Mode of transport: some incoterms are only to be used for certain
modes
- Control over documents and transport: companies can only agree to an
incoterm that gives them these responsibilities if they have the means
to organize it (operational)
- Risks of transport, liability: if the goods are valuable then taking
responsibility for the transport might be a bigger risk
- Position during the negotiation: big companies have an overall stronger
position in negotiations
- Possibility to arrange customs formalities: companies can only agree to
an incoterm that gives them these responsibilities if they have the
means to organize it (operational)
- Political/social risks: if there are many political or social risks companies
might want to play it safe and not take too many responsibilities
- Profitable rates for carriage and insurance: big companies who
guarantee annual volumes of goods can get profitable rates and might
for this reason want to handle the organisation of the transport
Groups of Incoterms (division by task allocation)
- E-group: sellers has the fewest tasks, costs and risks
EXW
- F-group: buyer has to pay for the main carriage
FCA
FOB
FAS
- C-group: seller has to pay for the main carriage
CPT
CIP
CFR
CIF
- D-group: sellers has the most tasks, costs and risks (delivery at port or
at place of destination)
DPU
DAP
, DDP
Main carriage: the longest stretch of the transport (biggest
distance)
Pre-carriage: shipment from the seller to the port
On-carriage: shipment from the port to the buyer
Group is determined by the starting letter of the Incoterm
1.3 The Incoterms by mode of transport
Groups of incoterms (division by mode of transport):
- Multimodal terms (for any kind of transport):
EXW: ex works
FCA: free carrier
CPT: carriage paid to
CIP: carriage and insurance paid to
DAP: delivered at place
DPU: delivered at place unloaded
DDP: delivered duty paid
Multimodal in this context just refers to them being usable for all
modes of transport but it doesn’t mean the transport itself has to
be multimodal.
- Unimodal terms (only transport by vessel, barge or sea transport):
FAS: free alongside ship
FOB: free on board
CFR: cost and freight
CIF: cost, insurance and freight
You may also use multimodal terms for water related shipments,
but specific rules apply for water relates shipments which makes
the unimodal terms a better option.
Unimodal terms may be used for multimodal transport (f.e. Ocean
shipment + barge shipment)
Delivery (context: Incoterms):
- In essence the transfer of risks from the seller to the buyer
- When the delivery happens depends on the chosen incoterm:
When the goods are placed at the disposal of the buyer
(physically the goods are still with the seller, but he has reserved
them for this specific buyer)
When the goods are handed over for carriage (when the goods
are handed over to any carrier)
When the goods arrive at the destination
General obligations (context: Incoterms)
- Seller: produce and provide the product
- Buyer: pay for the product
1.4 The application of the incoterms
Usage of the incoterms is not mandatory by law, but it is a generally
accepted practice.
- They help to clarify the interpretation of a contract by all parties
Incoterms do not cover any legal delivery: transfer of ownership of the
goods (they only cover who needs to take care of the risks, costs and tasks
of the goods)
Definition of trade: exchanging products and/or services against payment.
- Goal: import products from other countries and make money by doing
so
1. Incoterms 2020
1.1 The necessity of international rules
Commercial contracts are made between sellers and buyers.
- Seller must deliver
- Buyer must pay
If they do not make any arrangements the legal rules of the country
governing the contract apply.
As a result of commercial contracts there will be costs, risks and tasks that
need to be divided between sellers and buyers
Incoterms (international commercial terms) help sellers and buyers
divide them in a clear and uniform manner
Incoterms are published by the ICC (international chamber of commerce)
- Main goal of the ICC: facilitating worldwide trade by assisting
companies with export and import
They also provide documents such as certificates of origin
How do seller and buyer come to a commercial agreement/contract?
1. Negotiation between seller and buyer
- Seller wants to attract as many new customers as possible
- Buyer wants to make the best deal
Buyer will demand offers from multiple sellers
Sellers will send an offer and set the prize
Buyer will confirm the offer he likes the best
2. Buyer and seller agree -> commercial agreement
- Buyer and seller will now discuss further to divide the costs, risks, and
tasks to come to a commercial contract.
Usage of the incoterms: buyer and seller can easily divide tasks,
risks and costs by choosing an appropriate incoterm (this step
provides clarity and uniformity to both parties)
Commercial relevance of incoterms:
- The cost of the trade for each party is determined by the chosen
incoterm
Sellers might offer a lower prize if the buyer takes more
responsibility through the chosen incoterm (f.e. buyer will pay for
the shipment and organize the shipment)
Operational relevance of incoterms:
- Once you agree to a specific incoterm, you agree to take on the risks
and costs, but also the tasks. You must complete these tasks or you
would be breaching your contract.
Whenever you agree to an incoterm it’s important to know very
well what you are agreeing to exactly. What tasks, risks and costs
will you (or your company) have?
, What costs/tasks can be the result of a commercial contract?
- Transport
- Loading/unloading/handling
- Storage
- Checking/Packaging/marking/weighing/measuring
- Insurance
- Customs formalities
Always depend on the specific commercial agreement
What risks can be the result of a commercial contract?
Who is responsible in case of damage or loss?
- We can determine 6 categories:
o Product – Industrial: Packing/conditioning/fire/combustion
o Commercial: theft/non-arrival/disappearance
o Legal
o Political - Public – Economical: Malicious
damage/vandalism/piracy
o Transport:
Manipulation/loading/discharge/stuffing/transhipment/Jettison
(goods falling overboard) /Washing (water damage)
overboard/accidents/catastrophes/fire/combustion
o Geophysical: accidents/catastrophes
Damaged goods: if the goods are damaged the buyer might refuse
the shipment
First set of incoterms: 1936
- FAS, FOB, C&F, CIF, Ex Ship and Ex Quay
Every 10 years the incoterms are revised to adjust to the
development of trade, geopolitical complications, different modes
of transport and different types of cargo.
Current incoterms: 2020
- 11 trade terms
1.2 The Incoterms 2020
Buyer and seller are always free to refer to previous incoterms (if they both
agree to this and know the consequences)
Important: incoterms are always an agreement between buyer and seller,
if a local law implicates the use of said incoterm, the law must be followed
because it hold more power than the agreement between seller and the
law.
Incoterms are only officially applicable if they are mentioned in the
commercial contract between seller and buyers, if not the
agreement of the incoterm holds no power.
How to refer to Incoterms?
, We make sure to refer to the version because each version has
updates and we want to make it clear which set of rules we’re
referring to
What factors influence the decision of the incoterm?
- Mode of transport: some incoterms are only to be used for certain
modes
- Control over documents and transport: companies can only agree to an
incoterm that gives them these responsibilities if they have the means
to organize it (operational)
- Risks of transport, liability: if the goods are valuable then taking
responsibility for the transport might be a bigger risk
- Position during the negotiation: big companies have an overall stronger
position in negotiations
- Possibility to arrange customs formalities: companies can only agree to
an incoterm that gives them these responsibilities if they have the
means to organize it (operational)
- Political/social risks: if there are many political or social risks companies
might want to play it safe and not take too many responsibilities
- Profitable rates for carriage and insurance: big companies who
guarantee annual volumes of goods can get profitable rates and might
for this reason want to handle the organisation of the transport
Groups of Incoterms (division by task allocation)
- E-group: sellers has the fewest tasks, costs and risks
EXW
- F-group: buyer has to pay for the main carriage
FCA
FOB
FAS
- C-group: seller has to pay for the main carriage
CPT
CIP
CFR
CIF
- D-group: sellers has the most tasks, costs and risks (delivery at port or
at place of destination)
DPU
DAP
, DDP
Main carriage: the longest stretch of the transport (biggest
distance)
Pre-carriage: shipment from the seller to the port
On-carriage: shipment from the port to the buyer
Group is determined by the starting letter of the Incoterm
1.3 The Incoterms by mode of transport
Groups of incoterms (division by mode of transport):
- Multimodal terms (for any kind of transport):
EXW: ex works
FCA: free carrier
CPT: carriage paid to
CIP: carriage and insurance paid to
DAP: delivered at place
DPU: delivered at place unloaded
DDP: delivered duty paid
Multimodal in this context just refers to them being usable for all
modes of transport but it doesn’t mean the transport itself has to
be multimodal.
- Unimodal terms (only transport by vessel, barge or sea transport):
FAS: free alongside ship
FOB: free on board
CFR: cost and freight
CIF: cost, insurance and freight
You may also use multimodal terms for water related shipments,
but specific rules apply for water relates shipments which makes
the unimodal terms a better option.
Unimodal terms may be used for multimodal transport (f.e. Ocean
shipment + barge shipment)
Delivery (context: Incoterms):
- In essence the transfer of risks from the seller to the buyer
- When the delivery happens depends on the chosen incoterm:
When the goods are placed at the disposal of the buyer
(physically the goods are still with the seller, but he has reserved
them for this specific buyer)
When the goods are handed over for carriage (when the goods
are handed over to any carrier)
When the goods arrive at the destination
General obligations (context: Incoterms)
- Seller: produce and provide the product
- Buyer: pay for the product
1.4 The application of the incoterms
Usage of the incoterms is not mandatory by law, but it is a generally
accepted practice.
- They help to clarify the interpretation of a contract by all parties
Incoterms do not cover any legal delivery: transfer of ownership of the
goods (they only cover who needs to take care of the risks, costs and tasks
of the goods)
