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International Freight Terms and Corresponding Issues

Our White Paper titled, “Legal Terms Surrounding The Transportation Process That Have Significant Impact On How Business Is Conducted And Where Responsibility Is Assigned” neglected to identify that the terms were for domestic transportation.  So, to all of our readers who took the time to point this out, we thank you.

In order to best understand a subject and to effectively articulate and communicate ideas, thoughts and issues, it is imperative that we share definitions.  In this connection, the international transportation and foreign trade interests cried out for such standards; the result of the process is Incoterms.

The first published set of terms was complied by the International Chamber of Commerce (ICC-not to be confused with the now defunct Interstate Commerce Commission) in 1936 and has been updated and continues to reflect current practices.

One of the unique differences between the use of domestic freight terms is that they stand alone when compared with international terms.  International terms (Incoterms) are compound and include, or at least, suggest terms of purchase and terms of sale along with the rules of engagement.  On the other hand, the domestic comparison would be the combined use of freight terms and terms of sale.  As an example, consider EXW, its domestic counterpart could be “FOB named point, Freight Collect”—title passing at time and place of pickup, without assuming the burden of transportation. 

INCOTERMS-Definitions

EXW + location name – (Ex Works) – In its simplest form, this term essentially states that the buyer takes possession of the goods at a named location such as, the factory, warehouse, address, etc. and that the seller bears no responsibility for the loading of the freight or subsequent transportation and documentation.  The responsibility to deliver is the Shipper’s to the point that goods are delivered at the Shipper’s premises. The Buyer is responsible for all costs and risks associated with the loading and delivery of the goods to the Buyer’s destination, and for clearing the goods for export.

FCA + location name – ( Free Carrier) – The sellers responsibility to deliver is achieved by the seller delivering the goods, cleared for export,  to the buyer’s carrier. There are very typical issues that are usually addressed when using this term.  As an example, if no location is designated by the buyer, the seller can reasonably assume the responsibility to name the place where the carrier will take the goods into his custody.  As stated in our white paper on Domestic Freight Terms and Terms of Sale/Purchase, it is important to avoid, “silence speaking”.  In international passage of title and freight terms a great deal more exposure can be incurred. As an example, should the buyer request the seller’s assistance in connection with securing a carrier contract it is commercially acceptable that, when the seller’s assistance is requested in securing the contract with the carrier, the seller would be acting at the risk and expense of the buyer.  If no precise point at the designated delivery location is mentioned, the Shipper may choose the place at the Buyer’s location where the Carrier will take over responsibility of the goods. (This term can refer to any mode of transport, including intermodal).  Although the word, “carrier” is well know and understood by all of us, FCA does allow for the imposition of a non-carrier to become a carrier in the following instance.  Should the buyer nominate a party other than the carrier to receive the goods, the seller is deemed to have satisfied his obligation of delivery to the carrier.

FAS + port of export – (Free Along Side Ship) – The responsibility to deliver is the Shipper’s to the point that goods are delivered along side the ocean vessel, either at the quay (A wharf or reinforced bank where ships are loaded or unloaded) or on a lighter (A large flat-bottomed barge, especially one used to deliver or unload goods to or from a cargo ship or transport goods over short distances) or directly onto the cargo ship, at the designated port of shipment. The Buyer assumes all costs and responsibilities for the shipment at that point and must clear the goods for export. (This term is only used for transportation by water). 

FOB + port of export – (Free on Board) – The responsibility is the Shipper’s to clear the goods for export and to deliver the goods over the threshold of the vessel. The Buyer assumes all costs and risks from that point. (This term is not appropriate for containerized cargo or for cargo carried aboard a roll on/roll off ro-ro vessel to which FCA should be used)

CFR + destination port – (Cost and Freight) – The Shipper is responsible for clearing the goods for export and for the costs to deliver the goods to the port of destination. Actual transfer occurs when the goods are brought over the ship’s rail, and, from the point that the goods cross the threshold of the vessel at the port of embarkation, the risk of loss or damage to the goods and any additional costs incurred while on the vessel are the responsibility of the Buyer. (This term is not appropriate for containerized cargo or for cargo carried aboard a roll on/roll off ro-ro vessel to which CPT should be used)

CIF + destination port – (Cost, Insurance, and Freight) – The Shipper has the same obligations as in CFR with the additional responsibility to provide at least minimum insurance coverage to protect the Buyer’s risk during ocean transport. The parties can agree for the purchase of insurance coverage greater than the minimum. (This term is not appropriate for containerized cargo or for cargo carried aboard a roll on/roll off ro-ro vessel to which CPT should be used)

CPT + destination place – (Carriage Paid To) – The Shipper is responsible for clearing the goods for export and for all risk and costs incurred in delivering the goods to their named destination. Additional costs incurred after the goods are in possession of the Carrier are transferred to the Buyer after the goods are in the possession of the Carrier. The definition of Carrier under this term refers to any mode or combination of modes used to transport the goods.

CIP + destination place – (Carriage and Insurance Paid to) – The Shipper has the same obligations as in CPT with the additional responsibility to provide at least minimum insurance coverage to protect the Buyer’s risk during transport. As in CIF, the parties can agree to additional insurance coverage.

DAF + named place – (Delivered At Frontier) – The Shipper is responsible for clearing the goods for export and for delivering the goods to a named point and place at the frontier, before reaching the Customs border of the destination country. Because the term can refer to any frontier, including the country of export, it is important to be clear in naming a specific frontier point and place.

DES + destination port – (Delivered Ex Ship) – The Shipper is responsible for all risk and costs of the goods until the goods are turned over to the Buyer on board the vessel. The Buyer is responsible for all risks and costs in bringing the goods to the destination port and in clearing the goods for import. (This term can only be used for water transport)

DEQ + destination port – (Delivered Ex Quay or Duty Paid) – The Shipper is responsible for clearing the goods for import and until the goods are made available to the Buyer on the quay or wharf (see definition of Quay at FAS) of the destination port. Unless stated differently, the Shipper has responsibility for all duties, taxes and other costs in delivering the goods.

NOTE: If the Buyer is to be responsible for clearing the goods for import and for paying the import duties, the term “Duty Unpaid” should be used instead of “Duty Paid.”

NOTE: If other charges, such as Value Added Taxes, are to be excluded from the Shipper’s responsibility, the terms should be clarified by adding “VAT unpaid” to the DEQ designation. (This term can only be used for water transport)

DDU + place of destination – (Delivered Duty Unpaid) – The Shipper is responsible for the goods until they are made available to the Buyer at the named place in the destination country. The Shipper has responsibility for all costs in export and in transporting the goods to that point. The Buyer has responsibility for all duties, risks, taxes and other charges involved in importing the goods.

NOTE: If the Shipper agrees to accept responsibility for any of the import-related costs, the additional obligation should be made clear by adding specific responsibility, such as “duty unpaid, VAT paid” or other agreed upon terms.

DDP + place of destination – (Delivered Duty Paid) – The Shipper is responsible for the goods until they are made available to the Buyer at the named place in the destination country. The Shipper assumes all risks and costs including import licenses, duties, taxes and other Customs charges necessary to clear the goods through the import process. This term should not be used if the Shipper is unable to obtain the necessary import licenses or other import documents.

NOTE: If the Shipper agrees to exclude some of the import related costs, the limited obligation should be made clear by adding specific responsibility, such as “duty unpaid, VAT paid” or other agreed upon terms.

NOTE: If the Buyer has responsibilities for all import charges, the alternative DDU term should be used instead.

Many of our professional logistics and transportation readers have expressed an interest in contributing to our white papers.  We encourage this as a means to maintain this open forum for the exchange of real ideas and issues.  It is simple to participate; either reply to this email or contact me by phone, fax or letter. 

Continuation

Please consider this white paper as a beginning in this subject area, succeeding white papers will address common issues and address them with common solutions.  We encourage our readers to direct any specific questions or comments to papers@transportgistics.com .

Disclaimer

The information presented above represents the opinion of the author and not necessarily the opinion of TransportGistics, Inc. nor is it presented as a legal position.

Additional Resources

Deciphering Incoterms