INTERNATIONAL PURCHASING

Unit Code: BCP 400

INCOTERMS
International Commercial Terms and Their Definitions

Dr. Evans Oteki, Ph.D.

07/25/2021 1
INCOTERMS
What Are INCOTERMS?
 Three-letter trade terms used in international sale of goods contracts
 Terms are developed and maintained by experts brought together by the
International Chamber of Commerce (ICC)
 The Incoterms are not mandatory rules – for them to receive legal effect,
they must be explicitly incorporated by the parties into their contract.
 Over the years, Incoterms rules have provided guidance to importers,
exporters, lawyers, transporters, insurers, and others involved in
international trade.
 In the new revision Incoterms 2020, the number of terms still stays at 11.
 They are universally accepted
What Do INCOTERMS Do?

INCOTERMS offer rules that outline transfer of goods responsibilities for sellers and buyers.

They assign transportation costs and responsibilities connected with the delivery of goods between importers and

exporters.
They reduce misunderstandings among traders, which reduces trade disputes and lawsuits.

Reduces Uncertainties

Avoids different interpretations in different countries & languages.

Additional costs and time can be avoided

 
Imagine a scenario
General flow of goods in international Purchasing
Manufacturer/Seller
Packaging
Loading
Transportation to seller appointed place
Customs clearance for exports
Handling outbound
Insurance
Main international transportation / handling inbound
Customs clearance
Final destination
Unloading
Elements of a contract
When you are negotiating a contract with a seller, you’ll need to discuss
and agree:
where the goods will be delivered
who arranges transport
who handles and pays for insurance
who handles customs procedures
who pays any duties and taxes
Classification into four categories
The Incoterms are divided into four principal categories: E, F, C and D.

Category E (Departure), which contains only one trade term, i.e. EXW (Ex Works).

Category F (Main Carriage Unpaid), which contains three trade terms:

FCA (Free Carrier)
FAS(Free Alongside Ship)
FOB (Free on Board)
Category C (Main Carriage Paid), which contains four trade terms:
CPT (Carriage paid to)
CIP (Carriage and Insurance paid to)
CFR (Cost and Freight)
CIF (Cost, Insurance and Freight)
Category D (Arrival), which contains three trade terms:
DAP (Delivered at Place)
DPU (Delivered at Place Unloaded)
DDP (Delivered Duty Paid)
Classification of Incoterms into modes
2. Rules for Sea and Inland Waterway
1. Rules for Any Mode of Transport transport
 EXW (EX-WORKS)  FAS (FREE ALONGSIDE SHIP)
 FCA (FREE CARRIER)  FOB (FREE ON BOARD)
 CPT (CARRIAGE PAID TO)  CFR (COST AND FREIGHT)
 CIP (CARRIAGE AND INSURANCE  CIF (COST INSURANCE AND
PAID TO) FREIGHT)
 DAP (DELIVERED AT PLACE)
 DPU (DELIVERED AT PLACE
UNLOADED)
 DDP (DELIVERED DUTY PAID)
Rules for Any Mode of Transport.
EXW – Ex Works

“Ex Works” means that the seller delivers his contract requirements when it places

the goods at the disposal of the buyer at the seller’s premises or at another named
place (i.e., works, factory, warehouse, etc.).
The seller does not need to load the goods on any collecting vehicle, nor does it

need to clear the goods for export, where such clearance is applicable.
This rule may be used irrespective of the mode of transport selected and may also

be used where more than one mode of transport is employed.

EXW is mostly suitable for domestic trade.
FCA – Free Carrier
 “Free Carrier” means that the seller delivers the goods to the carrier or another person
nominated by the buyer at the seller’s premises or another named place.
 The seller could be involved in the actual movement of the cargo up to a certain point.
 This point could be the warehouse of the carrier, the warehouse of the buyer’s agent, the
port or a terminal in the port or any other location agreed between the buyer and seller.
 The seller’s obligations, risks and costs are till the agreed point of delivery, and the
buyer’s obligations, risk and costs start from that agreed point of delivery.
In an FCA transaction, the seller must take care of
 All pre-export documentation relating to the shipment such as port, customs, transport
documentation till the point of delivery
 Export customs clearance where required
 Loading formalities if the delivery point is agreed to be the seller’s warehouse/premises
CPT – Carriage Paid To
“Carriage Paid To” means that the seller delivers the goods to the carrier or another person
nominated by the seller at an agreed place
The seller must contract for and pay the costs of carriage necessary to bring the goods to the
named place of destination.
CPT terms could generally end at
 A seaport in the destination country
 An inland container depot in the destination country
 A door location in the destination country
In a CPT transaction, the buyer takes care of
 Any transport movement from the agreed place of destination
 The risk from the time the seller hands over the cargo to the 1st carrier
 The full cargo insurance portion from origin to destination
 Any and all import permits, quotas, special documentation, etc relating to the cargo
 Import customs clearance and all related formalities
CIP – Carriage and Insurance Paid To
 “Carriage and Insurance Paid to” means that the seller delivers the goods to the carrier or
another person nominated by the seller at an agreed place
 And that the seller must contract for and pay the costs of carriage necessary to bring the
goods to the named place of destination.
 The seller is also obliged to arrange for insurance to cover the buyer’s risk of loss of or
damage to the goods during carriage
As part of fulfilling this obligation, the seller must
 Do the export clearance formalities
 Pay for the transportation from his door to the named and agreed destination
 Enter into the relevant contract of carriage with the various carriers
 Arrange and pay for the insurance to cover the buyer’s risk
 Take care of any and all export permits, quotas, special documentation, etc relating to
the cargo
DAP – Delivered At Place
 “Delivered at Place” means that the seller delivers his part of the contract when the goods
are placed at the disposal of the buyer on the arriving means of transport ready for
unloading at the named place of destination.
 The seller bears all risks involved in bringing the goods to the named place.
As part of fulfilling this obligation, the seller must    
 Do the export clearance formalities
 Pay for transportation from his door to the agreed destination
 Enter into relevant contracts of carriage with the various carriers up to the name
destination including any on-carriages applicable
 Take care of any and all export permits, quotas, special documentation, etc. relating to the
cargo
 All risk up to the agreed point of delivery
 Must ensure that the goods actually arrive at the destination.
DPU – Delivered to Place Unloaded
 “Delivered at Place Unloaded” means that the seller delivers the goods while transferring the
risk to the buyer when the goods are unloaded from the arriving means of transport at the
disposal of the buyer at the named place of destination or any other agreed point within that
place.
 The seller bears all risks involved up to the named place of destination including the risk of
moving the goods and unloading them.
 Under DPU, both the delivery and arrival at destination are the same and is the only rule
which requires the seller to unload goods at the destination.
 The seller should ensure that they have an agent or other arrangements in position to make
sure that the unloading at the named place takes place smoothly.
DPU terms could generally end at
A seaport or a specific terminal within the port in the destination country
A nominated custom bonded inland container depot or terminal in the destination country
A warehouse of the buyer or their nominated agent
As part of fulfilling this obligation in DPU, the seller must
 Do the export clearance formalities
 Pay for the transportation from his door to the named terminal
 Enter into relevant contracts of carriage with the various carriers up to the named terminal
 Take care of any and all export permits, quotas, special documentation, etc. relating to the cargo
 All risk up to the agreed point of delivery
 Must ensure that the goods arrive at the destination.
In a DPU transaction, the buyer takes care of
Any transport movement from the agreed place of destination
Any risk after cargo has been unloaded at the agreed destination
Any insurance past the point of delivery
Any and all import permits, quotas, special documentation, etc relating to the cargo at the
destination
Import customs clearance and all related formalities
DDP – Delivered Duty Paid
“Delivered Duty Paid” means that the seller delivers the goods when the goods are
placed at the disposal of the buyer, cleared for import on the arriving means of
transport ready for unloading at the named place of destination.
The seller bears all the costs and risks involved in bringing the goods to the place
of destination and has an obligation to clear the goods not only for export but also
for import, to pay any duty for both export and import and to carry out all customs
formalities.
DDP may be considered as a term at the other end of the trade spectrum in terms
of obligations as compared to EXW where the buyer has the maximum obligation.
In DDP, the seller has the maximum obligation as it involves the delivery of the
goods to the buyer at the agreed destination.
So, if you are the buyer buying on DDP basis, you can take a seat and relax while the seller
will
 Do the export clearance formalities
 Pay for the transportation from his door to the agreed destination
 Enter into relevant contracts of carriage with the various carriers up to the agreed destination
including any on-carriages applicable
 Take care of any and all export permits, quotas, special documentation, etc. relating to the cargo
 Cover all risk up to the agreed point of delivery
 Ensure that the goods actually arrive at the destination
 Take care of customs clearance formalities at the destination port(s), pay the duty, VAT, and other
local charges applicable
In a DDP transaction, the buyer only needs to take care of
 Any further transport movement from the agreed place of destination
 Any risk after the cargo has been delivered at the agreed destination
 Any insurance past the point of delivery
Advise
 Buyers must be aware that when using a DDP term, they could end up paying more cost to the seller because the seller’s

cost includes the customs clearance costs, etc.

 Because the seller is not based in the country of destination, chances are that their local costs at destination may be

higher than what the buyer can secure locally.

 The buyer must also verify that the seller is capable of securing the import clearance directly or indirectly as otherwise

there could be delays in the transaction.

 Although the seller’s obligation ends with the delivery of the goods at the named place, cleared, in some cases,

the seller may require the assistance of the buyer in securing some documents required for the local customs
clearance.
 Similarly, if there is any pre-shipment inspection required by the buyer or destination, port, and customs

authorities the charges for same will be for the seller’s account unless otherwise specifically agreed between the
buyer and seller.
Rules for Sea and Inland Waterway transport
FAS – Free Alongside Ship
“Free Alongside Ship” means that the seller delivers his part of agreement when the
goods are placed alongside the vessel (e.g., on a quay or a barge) nominated by the
buyer at the named port of shipment.
The risk of loss or damage to the goods passes when the goods are alongside the
ship, and the buyer bears all costs from that moment onwards.
In a FAS term shipment, the seller should:    
Handle the export clearance formalities for shipment
Pay for the transportation from his door to the agreed port, terminal, quay or ship
Enter into relevant contracts of carriage with the various carriers including any pre-
carriages applicable up to the agreed port, terminal, quay or ship
Take care of any and all export permits, quotas, special documentation, etc. relating
to the cargo
Cover all risk up to the agreed point of delivery
FOB - Free On Board
 “Free on Board” means that the seller delivers the goods on board the vessel nominated by the buyer at
the named port of shipment or procures the goods already so delivered.
 The risk of loss of or damage to the goods passes when the goods are on board the vessel, and the buyer
bears all costs from that moment onwards.
In a FOB term shipment, the seller should:
 Handle the export clearance formalities for shipment
 Pay for the transportation from his door till the goods are loaded onboard a ship
 Enter into relevant contracts of carriage with the various carriers including any pre-carriages applicable
up to the agreed point
 Take care of any and all export permits, quotas, special documentation, etc. relating to the cargo
 Cover all risk up to the agreed point of delivery
In a FOB transaction, the buyer needs to take over all obligations from that point of delivery
including
 Nominating the right type of ship for the loading of the cargo
 Organize suitable contract of carriage with the most suitable carrier
CFR – Cost and Freight
“Cost and Freight” means that the seller delivers the goods on board the vessel
The risk of loss or damage to the goods passes when the goods are on board the
vessel.
The seller must contract for and pay the costs and freight necessary to bring the
goods to the named port of destination.
In CFR since the contract of carriage is arranged by the seller at his expense, it is
normal for the seller to use his service contract and also prepay the cost of the
freight up to the destination.
As part of fulfilling this obligation, the seller must
Do the export clearance formalities
Pay for the transportation from his door to the named and agreed destination and
enter into a relevant contract of carriage with the various carriers
Take care of any and all export permits, quotas, special documentation, etc. relating
to the cargo
Pay for the loading and unloading costs of the cargo on/from the ship
In a CFR transaction, the buyer takes care of
Any transport movement past the agreed place of destination including on-carriage
etc
The risk from the time the seller delivers the cargo onboard the ship
Any and all import permits, quotas, special documentation, etc. relating to the cargo
Import customs clearance and all related formalities
CIF – Cost, Insurance, and Freight
 “Cost, Insurance and Freight” means that the seller delivers the goods on board the
vessel
 The risk of loss or damage to the goods passes when the goods are on board the vessel.
The seller must contract for and pay the costs and freight necessary to bring the goods to
the named port of destination.
 In a CIF transaction, the seller is obliged to arrange for the movement of the cargo to the
named destination, and since CIF may be used only for waterway transport, this
destination must be a destination accessible through waterways.
 The insurance cover secured by the seller should be equal to the commercial value of the
product as agreed in the contract of sale + 10% which is to cover the average profit that
the buyer may make.
 In CIF terms, the seller is obliged to provide the buyer with the required transport
document – such as a bill of lading as proof of delivery and termination of his risk.
As part of fulfilling this obligation, the seller must
 Do the export clearance formalities
 Pay for the transportation from his door to the named and agreed destination and enter
into the relevant contract of carriage with the various carriers
 Obtain and pay for cargo insurance
 Take care of any and all export permits, quotas, special documentation, etc. relating to
the cargo
 Pay for the loading and unloading costs of the cargo on/from the ship
In a CIF transaction, the buyer takes care of
 Any transport movement past the agreed place of destination including on-carriage etc
 The risk from the time the seller delivers the cargo onboard the ship
 Any and all import permits, quotas, special documentation, etc. relating to the cargo
 Import customs clearance and all related formalities
Advice
If you are the buyer buying on CIF terms, it is imperative that you understand that
the seller only has to provide minimum insurance
While the seller is obliged to only provide minimum cover, the seller must ensure
that the insurance cover is for the entire duration of the carriage till the named
destination and not just till where the seller’s risk ends on board the ship.
The cover must protect the buyer from the moment he has to bear the risk of loss
of or damage to the goods (i.e., from the moment the goods are loaded on board at
the port of shipment) until the goods arrive at the agreed port of destination.
 INTERNATIONAL PURCHASING
INCONTERMS

Dr. Evans Oteki, Ph.D.

07/25/2021 30