HomeActivitiesA VIEW ON KEYS TO SUCEED IN COMMODITY TRADING : INCOTERMS

A VIEW ON KEYS TO SUCEED IN COMMODITY TRADING : INCOTERMS

Before considering shipping merchandise internationally, an important question must be answered: At which point are the risks and charges transferred to the buyer?

Today’s tendency in international business is based on the fact that the buyer is released from all logistics concerns. This valorises the position of the exporter. It is essential to negotiate the terms of the contract for the first shipment and, most of all, in the case of dealing with countries at risk, obtaining a document of credit as a form of payment will be advised.

In 1936, for the first time, the International Chamber of Commerce (ICC), published under the name of Incoterms 1936 (INternational COmmercial TERMS), a series of international rules that  will enable both buyer and seller to know more about commercial transaction

WHAT ARE INCOTERMS

Is all about a set of rules put in place in order to have a good commercial transaction between the seller and the customer. It defines the responsibilities of sellers and buyers for the sale of goods in international transaction. It also clarify the tasks , costs and risks being familiar to it helps in to improve smoother transactions by clearing define the various responsibilities.

Managing Risk Control

By making references in their contracts, using one of the Incoterms of the ICC, the buyer and the seller reduce the uncertain risks inherent in all international transactions: commercial practices and different interpretations from one country to the other. They specify their own respective responsibilities and obligations during the process of delivering the merchandise and the mandatory documentation that the vendor must supply. Also the Incoterms, even if they are optional, they are recognized as standardized clauses which will prevent any litigation by clearly distributing between the buyer and the vendor: obligations, risks, costs. In addition, they dissociate the question of transferring risks from those of transferring ownership, this last issue remains under the control of the law that rules the contract. Concretely, Incoterms  will clarify the following points:

  1. Place the critical point of transferring the risks from the vendor to the buyer during the process of shipping the goods (loss, damage or theft of the merchandise) allowing the one who is liable for these risks to make his own dispositions, notably in terms of insurance;
  2. Indicate which one, either the seller or the buyer, must underwrite the shipping contract;
  3. Distribute among the two parties the logistic and administrative charges during the different stages of the process;
  4. Specify who takes care of the packaging, labeling, handling operations, loading and unloading of goods or stuffing and stripping containers as well as inspection procedures;
  5. Set up the individual obligations of each party in the process of accomplishing export and/or import formalities, legal regulations and duty taxes as well as providing all the documents required. There are 11 Incoterms being kept by the ICC, (original English acronym made up of three letters, ex: FOB) plus one specific location ex: “FOB Le Havre”.

Dadjio Trading company illight you on the risk transfer

WHAT ARE THE DIFFERENTS INCOTERMS

INCOTERMS for any mode of transport – rail, road, sea, air, donkey cart……………

  1. EXW – EX WORKS
  2. FCA – FREE CARRIER
  3. CPT – CARRIAGE PAID TO
  4. CIP – CARRIAGE AND INSURANCE PAID TO
  5. DAT – DELIVERED AT TERMINAL
  6. DAP – DELIVERED AT PLACE
  7. DDP – DELIVERED DUTY PAID

incoterms for Sea and Inland waterway transport

  1. FAS – FREE ALONGSIDE SHIP
  2. FOB – FREE ON BOARD
  3. CFR – COST AND FREIGHT
  4. CIF – COST INSURANCE AND FREIGHT

Explanation of the Incoterms

1) EXW – EX WORKS (… named place of delivery)

The Seller’s only responsibility is to make the goods available at the Seller’s premises.. The Buyer bears full costs and risks of moving the goods from there to destination..

Seller

prepare the merchandise for the buyer, at his own premises, suitably packed for export shipping purposes (in general, the price includes loading the merchandise in the pallet).

Buyer

The buyer is responsible for all the charges and risks involved in the shipment of the merchandise from the moment it leaves the seller’s warehouse until it reaches its destination place.

The term EXW represents a minimum obligation for the seller. However, if the parties agree that the vendor insures the loading of the merchandise at the point of departure “EXW Loaded”, and  make the vendor responsible of these risks and charges, they have to precise this issue very clearly on an explicit clause included in the sales contract

The seller is expected to provide for the buyer, at his request and at his charge and risks, all the assistance required to obtain an export license, insurance and provide the buyer with all the useful information in his possession which will allow the buyer to insure the export of his merchandise in full security.

2) FCA – FREE CARRIER (… named place of delivery)

The Seller delivers the goods, cleared for export, to the carrier selected by the Buyer.

Seller

If the delivery takes place at the seller’s premises, it is the seller, who handles the loading of the suitably packaged goods into the vehicle provided by the buyer, (specify “FCA seller’s premises”). Export customs clearance is the responsibility of the seller.

Buyer

The buyer has chosen the type of transportation and the carrier with whom he has signed a transportation contract and pays for the main transportation (if applicable). The transfer of charges and risks takes place at the moment when the carrier picks up the merchandise. The parties must agree upon naming a place where to hand over the merchandise (the carrier’s terminal or the vendor’s premises).

The seller must, should the case arise, provide for the buyer, at the right time, all the assistance needed to obtain all the documents and information regarding the security requirements for the export and/or import of the merchandise and/or for its transportation to its final destination. The cost of the documents furnished and/or the assistance given are costs and risks paid by the buyer.
The Incoterms 2020 rules explicitly allow for the necessary transport to be performed under a contract of carriage or to be arranged by own means (without the involvement of a carrier acting as a third party).

3) CPT – CARRIAGE PAID TO (… named place of destination)

The Seller pays for moving the goods to destination.. From the time the goods are transferred to the first carrier, the Buyer bears the risks of loss or damage..

Seller

The seller controls the logistic chain. After having taken care of export customs clearance, he chooses the cargo carrier and pays the charges up to the designated place.

Buyer

The risk of damage or loss is borne by the buyer from the moment that the merchandise is loaded into the first carrier. After that, the buyer takes care of the import customs clearance and the unloading expenses.

Unloading fees

It is important to clarify the concept of who is responsible for the unloading charges into the frame of the transportation contract. Normally, the buyer must be responsible for these charges unless they are included in the transportation fee. In this case, they are charged to the vendor. The vendor must clarify this question with the buyer in order to prevent finding himself in a situation where the receiver refuses to pay and the cargo carrier turns back to the provider (the seller) to demand his part of the payment for the unloading charges as well as the eventual fees for the vehicle’s immobilization while waiting for the problem to be solved.

4) CIP – CARRIAGE AND INSURANCE PAID TO (… named place of destination)

The Seller pays for moving the goods to destination.. From the time the goods are transferred to the first carrier, the Buyer bears the risks of loss or damage.. The Seller, however, purchases the cargo insurance..

Seller

CIP is identical to CPT, but the seller must supply, in additional, a transportation insurance. The seller settles the transportation contract, pays the freight and the insurance premium. “Under the CIP rule of Incoterms 2020, the seller is required to obtain limited insurance coverage in accordance with Clause A of the Institute Cargo Clauses or any other similar set of clauses. However, the parties are free to agree on a lower level of cover.

Buyer

The risk of damage or loss is borne by the buyer from the moment that the merchandise is loaded into the first carrier. After that, the buyer takes care of the import customs clearance and the unloading expenses.

Insurance Coverage

According to the term CIP, the seller is not obliged to apply for insurance but for a minimum coverage. If the buyer wishes to protect himself by a superior coverage, under these circumstances, he would need to obtain the agreement of the seller or apply on his own for a complementary insurance.

Documents fees

The information and documents related to security, that the buyer needs for the export/import of merchandise and/or for the transportation up to its final destination must be provided by the seller at the request of the buyer and at his own charge and risks.

5) DAT – DELIVERED AT TERMINAL (… named terminal at port or place of destination)

The Seller delivers when the goods, once unloaded from the arriving means of transport, are placed at the Buyer’s disposal at a named terminal at the named port or place of destination..

“Terminal” includes any place, whether covered or not, such as a quay, warehouse, container yard or road, rail or air cargo terminal.. The Seller bears all risks involved in bringing the goods to and unloading them at the terminal at the named port or place of destination..

6) DAP – DELIVERED AT PLACE (… named place of destination)

The Seller delivers when the goods are placed at the Buyer’s disposal 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..

7) DDP – DELIVERED DUTY PAID (… named place)

The Seller delivers the goods cleared for import – to the Buyer at destination.. The Seller bears all costs and risks of moving the goods to destination, including the payment of Customs duties and taxes..

DadjioTrading Company helps you to know all the incoterms applied to your transaction

Knowing the Incoterms  is an integral part of a commercial transaction. It has to be done in function with the organizational capacities of the enterprise, the type of transportation used, the level of service that the enterprise wishes to provide to the client or the resources of its supplier, or it could be in function to the common practices of the market, or the practices used by the competitors, etc.