Incoterms Use for Shipping Terms

Incoterms rules are international trade terms promulgated by the International Chamber of Commerce (ICC). Though used primarily in international trade, they are seeing increasing use in domestic trade. When used, they should specify the specific shipping term, the location, Incoterms, and the edition. An example is “DAT Pier 82 Port of Philadelphia Incoterms® 2010. ” Incoterms rules specify the point at which risk of loss occurs, but not, strictly speaking, where title changes.

In addition, they specify which party is responsible for freight (or carriage) charges, but not payment terms for the goods themselves. The ICC prefers that “Incoterms” be used as an adjective, not a noun, in prose. The word itself is trademarked and the rules are copyrighted, so at least the last edition, Incoterms® 2010, should include the trademark. The U. S. national council of the ICC is the U. S. Council for International Business (USCIB). The leading U. S. authority is Frank Reynolds, who served on the eight-member committee of the ICC which drafted the Incoterms® 2010 rules.

New rules have been published every ten years, and the second latest, Incoterms 2000, is still in widespread use. The rules are brought more up-to-date in their application, and sometimes, old terms are deleted and new terms are added. There has been a tendency to incorporate container shipment provisions and to place responsibility for export specifics more on the seller and import specifics more on the buyer. The edition of the rules should always be specified, such as “FOB Terminal 86 Port of Seattle Incoterms 2000. The named place (“delivery” under Incoterms rules) is where the risk of loss changes, and usually, but not always, where responsibility for carriage charges changes. Incoterms rules are not law and are incorporated into the sales contract by explicit reference to them. The sales contract includes additional specifics of the contract and may modify the Incoterm chosen. However, the International Chamber of Commerce cautions that Sometimes the parties want to alter an Incoterms rule. The Incoterms® 2010 rules do not prohibit such alteration, but there are dangers in so doing.

In order to avoid any unwelcome surprises, the parties would need to make the intended effect of such alterations extremely clear in their contract. Thus, for example, if the allocation of costs in the Incoterms 2010® rules is altered in the contract, the parties should also state whether they intend to vary the point at which the risk passes from the seller to the buyer. Domestic trade is likely to see increasing use of the ICC’s international commercial terms. The 2000 edition of Incoterms first provided for this, and the subtitle of Incoterms 2010® is actually ICC rules for the use of domestic and international trade terms. As a result, the Incoterms® 2010 clearly states in a number of places that the obligation to comply with export/import formalities only exists where applicable. Domestic trade terms from the UCC, even those which use the same letters, are not precisely the same as the international trade terms. FOB, or free on board, is more restricted and precisely defined internationally and is only used for water transportation, whereas it may be used for any form of transportation domestically. The UCC provisions are rather short and dated compared with the more up-to-date, detailed rules found in Incoterms® 2010.

A total of eleven Incoterms rules are available, down from thirteen in Incoterms 2000. These three-letter terms give responsibilities for, in addition to delivery and shipment charges, document provision, information availability, and security coordination.

EXW — Ex-works.

Here the seller merely makes the goods available at its premises and the buyer, or more likely the buyer’s freight carrier, picks them up. The seller does not clear the goods for export. However, the exporter’s government sometimes requires the manufacturer to file particular documents (in the U. S. the manufacturer is the “Principal Party in Interest” even if another party exports the goods out of the country), so despite the limited obligations of the exporter under this term, many authorities conclude that other shipment terms, such as FCA, are usually more appropriate in international trade. In addition, from the point of view of the buyer, the seller is usually in a better position to handle the export legalities. FCA—Free Carrier. The seller’s responsibility is to get the goods to the carrier nominated by the buyer. The location specified, however, maybe the seller’s place of business.

Under EXW the seller is not obligated to load the goods, but if under FCA the seller’s place of business is specified as the location of delivery, it is. If the terms are FCA somewhere else, then the seller does not have to load the goods on the carrier’s vehicle but simply gets them to the carrier’s location. Once the seller gets the goods to the carrier, the risk of loss and responsibility for shipping charges rests with the buyer. This term is seeing increasing use and is well-suited for intermodal and containerized transport.

CPT—Carriage Paid

CPT is quite similar to the more common CFR. Like CFR, the seller chooses the carrier and pays for shipment, but the risk of loss passes to the buyer after the goods have been delivered by the seller to the carrier. CIP—Carriage and Insurance Paid to. Under CPT and CIP the seller chooses and pays the carrier. Under FCA the buyer chooses the shipping company and pays it. Under all three the risk of loss passes when the seller delivers the goods to the carrier. All three are used for intermodal and containerized transport. DAT—Delivered at Terminal. Incoterms rules give a named place.

Here the terms might be “DAT Pier 82 Port of Philadelphia Incoterms® 2010” which means that the seller gets the goods to Pier 82 and unloads them from the ship, and bears the risk of loss until they are in the terminal. DAP—Delivered at Place. Here the terms might be “DAP Area 14 Clover Shippers Cleveland Incoterms® 2010” which means that the seller gets the goods to Area 14, bearing the risk of loss and freight charges to that point, but unlike DAT the buyer is responsible for unloading the goods. DDP—Delivered Duty Paid. The seller does virtually everything, getting the goods to the buyer’s place of business.

EXW is the only term in which the buyer clears for export, and DDP is the only term in which the seller provides for import formalities. FAS—Free Alongside. Here the seller’s responsibility is to get the goods on the dock alongside the ship. From that point expenses and risk of loss are for the buyer. Under Incoterms rules, FAS, FOB, CFR, and CIF are only for water transport.

Domestic term FAS, Free Alongside, appears in the Uniform Commercial Code (UCC). As in the international version, it requires the seller to place the goods alongside the ship for shipment.

FOB—Free on Board.

The seller’s responsibility is to get the goods on board the ship. From that point expenses and risk of loss are for the buyer. Used especially for shipments of bulk items like grains, but not well-suited for containerized and intermodal freight, in which the seller typically gets the goods to a container staging area well away from the ship. (Under all previous Incoterms editions, water-based-transportation delivery occurred when the goods “passed the ship’s rail;” now delivery occurs when the goods are “on board” the ship. FOBS or FOBST are sometimes used, although they are not listed in Incoterms publications. FOBS means FOB Stowed, in which the seller is responsible for getting the goods down in the hold of the ship. FOB Stowed and Trimmed means that the seller is also responsible for balancing the cargo load so that the ship lies in the water correctly. FOBST L/S/D means the seller gets the goods on board the ship, stows them in the hold, trims the vessel, and provides lashing, securing, and dunnage for the goods, which means they are secured safely for transport and properly aerated.

The domestic term FOB, Free on Board, appears in the Uniform Commercial Code (UCC). Although FOB is probably the most widely-used Incoterms rule, it is even more widely used domestically, with well over half of domestic transport shipped under this three-letter code. Unlike the international version, the domestic version may be used for any type of transport, not just water-related. Incoterms rules provide much more detail than UCC provisions.

Incoterms rules specify the buyer as the party which nominates the carrier, and the buyer typically gives the specific time, dock, and ship to which the goods are to be delivered as well, but under domestic transport, the seller will often be the party which chooses the transportation company.

Internationally, FOB is referenced from a port of shipping, but domestically it may be specified from almost any location within the United States.

FOB Origin (or Shipping Point) means that the risk of loss passes to the buyer as the seller ships the goods from its premises. FOB Destination means that the risk of loss passes to the buyer only as the buyer receives the goods at its receiving dock. The parties may also specify a location for FOB responsibilities. A shipment of oranges from Florida to Minnesota could use the terms FOB Miami, FOB Minneapolis--or even FOB Atlanta, in which case the risk of loss and responsibility for payment of freight charges would transfer from the seller to the buyer in Atlanta.

Through usage a number of common modifiers have been appended to the basic domestic shipping terms:

1. FOB Origin, Freight Collect is usually how FOB Origin is stated. This means explicitly that the risk of loss passes to the buyer as the seller ships the goods, and that the buyer pays freight charges to the carrier.
2. FOB Origin, Freight Collect is by far the most common domestic shipping term. If only FOB is specified, or FOB Origin is specified, the shipment is assumed to be under FOB Origin, Freight Collect terms.
3. FOB Origin, Freight Prepaid passes the risk of loss to the buyer as the seller ships the goods but provides that it is the seller, and not the buyer, who pays freight charges to the carrier.

Also stated as

1. FOB Origin, Freight Allowed;
2. FOB Origin, Freight Prepaid, and Allowed.

FOB Origin, Freight Prepaid, and Added pass the risk of loss to the buyer as the seller ships the goods but provides that it is the seller who pays freight charges to the carrier.

However, the seller then adds the freight charge, typically as a separate line in the invoice, to the buyer’s bill. Also stated as

1. FOB Origin, Freight Prepaid, and Add;
2. FOB Origin, Freight Prepaid, and Charged;
3. FOB Origin, Freight Prepaid, and Charged Back.

FOB Destination, Freight Prepaid means that the seller bears the risk of loss in shipment and also pays the carrier. Universities usually prefer this term. Also stated as FOB Destination, Freight Prepaid, and Allowed. “FOB Destination” alone is assumed to be FOB Destination, freight prepaid. FOB Destination, Freight Prepaid, and Added means that the seller bears the risk of loss in shipment and pays the carrier, but then adds the freight charge, typically as a separate line in the invoice, to the buyer’s bill. Also stated as

1. FOB Destination, Freight Prepaid and Add;
2. FOB Origin, Freight Prepaid, and Charged;
3.  FOB Origin, Freight Prepaid, and Charged Back.

FOB Destination, Freight Collect states that the seller bears the risk of loss in shipment, but that the buyer pays the carrier.

FOB Destination, Freight Collect, and Allowed provides that the seller bears the risk of loss, the buyer pays the carrier and that the buyer deducts the freight charge as a separate line on the seller’s invoice. CFR—Cost and Freight. The seller’s quoted price includes freight. However, the risk of loss passes to the buyer when the goods are on board the ship. Many buyers initially like to use CFR or CIF as the seller handles more of the arrangements--choosing the shipping firm and paying for the freight.

However, more experienced buyers sometimes like to use FOB instead, as this gives them more control after the items reach the port of shipment. Although not listed in Incoterms publications, CFR FO and CFR LO are sometimes used as shipment terms. FO means free out, in which the price (to the buyer) does not include unloading (or discharging) at the port of destination. LO means liner out, in which the price does include discharge at the port of destination. CFR LO may also be given as CFR liner terms, CFR berth terms, or CFR landed.

Under plain CFR terms, the seller is under no strict obligation to pay for the discharge of the goods, but it is recognized that often he or she will as they may be included in the common shipment contract. If not, the buyer must use his or her own movers (stevedores) to get the goods off the ship. Incoterms rules specify obligations between buyer and seller. In contracts a party makes with a shipping company, “free” means it is free for the shipping company—FI or free in, the ship’s owner does not load the goods, but whoever charters the vessel does. FO or ree out means that the ship’s crew does not unload the goods, but rather that the charterer provides for discharging Liner in means that the ship owner loads the goods, and liner out means that the ship owner discharges the goods.

The domestic term Cost and Freight, or CF, CNF, or C&F, appears in the Uniform Commercial Code (UCC).

As in the international version, it requires the seller to place the goods on the vehicle for shipment. However, unlike the international version, the domestic version may be used for any type of transport, not just water-related.

In both international and U. S. versions, the seller pays the freight, but the risk of loss is the buyer's in shipment. Although not as frequently used as FOB, the terms CF (CFR Incoterms) and CIF are quite common, both domestically and internationally. CIF—Cost, Insurance, and Freight. Same as CFR except that insurance is included.  CIF appears in both Incoterms rules and the UCC. Under Incoterms EXW, FCA, FAS, and FOB the buyer selects the carrier. Under CFR, CIF, CPT, CIF, DAT, DAP, and DDP the seller selects the carrier.

FAS, FOB, CFR, and CIF are for water transportation only, but the others are for any mode of transport. Incoterms 2000 had 13 terms. EXW FCA FAS FOB CFR CIF CIP CPT DAF or delivered at the frontier. DES or delivered ex-ship. The seller got the goods to the buyer’s port but the buyer was responsible for unloading. This term was often used for coal and other large commoditized shipments. The domestic term Ex-ship appears in the Uniform Commercial Code (UCC) and provides, unlike the international version, that the seller unloads the goods onto the dock. DEQ or delivered ex-quay. The seller got the goods to the buyer’s port and got them unloaded on the dock or quay. DDU or delivered duty unpaid.

DDP title and accounting

Unlike international trade terms under Incoterms rules, domestic use of FOB may be for any transportation mode. The most common domestic shipping term is FOB Origin, Freight Collect, which means that the title and risk of loss pass to the buyer at the seller’s place of business, and the shipping company collects the charge from the buyer. Equivalently, FOB Shipping Point and Freight Collect is the same thing.

FOB Destination, Freight Prepaid means that title and risk of loss pass from the seller to the buyer at the buyer’s place of business, and the seller prepays the shipping charge to the shipping company. Accountants report a merchandiser’s and a manufacturer’s revenues when a sale is made. The term, FOB Shipping Point, indicates that the sale occurred at the shipping point—at the seller’s shipping dock. FOB Destination indicates that the sale will occur when it arrives at the destination—at the buyer’s receiving dock.

Accountants also assume that the cost of transporting the goods corresponds to these terms. If the sale occurred at the shipping point (seller’s shipping dock), then the buyer should take responsibility for the cost of transporting the goods. (The buyer will record this cost as Freight-In or Transportation-In. If the sale doesn’t occur until the goods reach the destination (terms are FOB Destination), then the seller should be responsible for transporting the goods until they reach the buyer’s unloading dock. (The seller will record the transportation cost as a system of freight transport based on a range of steel intermodal containers. Containers are built to standardized dimensions, and can be loaded and unloaded, stacked, transported efficiently over long distances, and transferred from one mode of transport to another—container ships, rail, and semi-trailer trucks—without being opened.

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Incoterms Use for Shipping Terms. (2017, Jan 10). Retrieved from https://phdessay.com/incoterms-use-for-shipping-terms/

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