Buyer and seller use to conclude a contract for purchase and sale of goods, they may freely negotiate the special terms with regard to price, quantity, properties, etc., as well as carriage, risks and surrender of the goods. Businesses involved in cross country trade, however, are frequently faced with different interpretations of identical formula and national commercial practices.
To counteract these difficulties, the parties to the contract can use what are known as Incoterms, which offer a range of international rules for interpreting the main forms of contract used.
Since its founding in 1919, the International Chamber of Commerce (ICC) has been committed to the facilitation of international trade. The Incoterms rules developed by ICC were created as an industry standard to facilitate international trade and for the interpretation of the trade terms that the parties to a contract of sale could agree to apply.
Different practices and legal interpretations between traders around the world necessitated a common set of rules and guidelines. As a response, ICC published the first Incoterms® rules in 1936. These are been maintaining and developing them ever since.
The Incoterm agreed by the parties determines which party is liable for the respective costs in the transport chain, for loading and unloading the goods and Customs clearance and at what point a party bears the risk of loss for an international shipment. Incoterms also affect the basis on which the imported goods are valued for Customs.
ICC's Incotermsrules are the world's essential terms of trade for the sale of goods. Whether it is a purchase order, packaging and labeling a shipment for freight transport, or preparing a certificate of origin at a port, the Incotermsrules are there to guide you. The Incotermsrules provide specific guidance to individuals participating in the import and export of global trade on a daily basis.
Incoterms cover following main responsibilities and obligations:
1. Point of delivery: here, the incoterms defines the point of change of hands from seller to buyer.
2. Transportation costs: here, the incoterms defines who pays for whichever transportation is required.
3. Export and import formalities: here, incoterms defines which party arranges for import and export formalities.
4. Insurance cost: here, incoterms define who takes charge of the insurance cost.
Over the years, Incoterms rules have provided guidance to importers, exporters, lawyers, transporters, insurers and others involved in international trade. The core functions of Incoterms used in international trade:
1. Outline the obligations of the buyer and the seller in a trade transaction,
2. Clarify when risk passes from seller to buyer under each of these rules,
3. Outline how costs are allocated between the buyer and the seller.
Incoterms (International Commercial Terms) are a set of rules which define the responsibilities of sellers and buyers for the delivery of goods under sales contracts. They are published by ICC and are widely used in commercial transactions.
ICC's has been established in 1919 as one of its first initiatives to facilitate international trade. In the early 1920's ICC set out to understand the commercial trade terms used by traders. This was done through a study that was limited to six commonly terms: FAS, FOB, C&F, CIF, Ex Ship and Ex Quay used terms in just 13 countries. The findings were published in 1923, highlighting disparities in interpretation.
Currently in its 8th version, Incoterms was first introduced in 1936 and as global trade developed and evolved, the Incoterms rules were also revised in 1957, 1967, 1976, 1980, 1990, 2000 and 2010 are to accommodate changes in global trade and incorporated 11 terms.
The 11 Incoterms are divided in two groups: those than can be used for any mode or modes of transport, and those used only for sea and inland waterway transport.
Incoterms for any mode or modes of transport:
* EXW Ex Works.
* FCA Free Carrier.
* CPT Carriage Paid to.
* CIP Carriage and Insurance Paid to.
* DAT Delivered at Terminal.
* DAP Delivered at Place
* DDP Delivered Duty Paid.
Incoterms only for sea and inland waterway transport:
* FAS Free Alongside Ship.
* FOB Free on Board.
* CFR Cost and Freight.
* CIF Cost, Insurance and Freight.
EXW - Ex Works - The seller delivers when it places the goods at the disposal of the buyer at the seller's location or at another specified place. The seller does not need to load the goods on any collecting vehicle, nor does it need to clear the goods for export.
FCA - Free Carrier - The seller delivers the goods to the carrier or another person nominated by the buyer at the seller's location or another named place.
FAS - Free Alongside Ship - The seller delivers when the goods are placed alongside the vessel nominated by the buyer at the named port of shipment. The risk of loss of or damage to the goods passes when the goods are alongside the ship, and the buyer bears all costs from that moment onwards.
FOB - Free On Board - The seller delivers the goods on board the vessel nominated by the buyer at the named port of shipment. 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.
CPT - Carriage Paid To - The seller delivers the goods to the carrier or another person nominated by the seller at an agreed place. The seller must pay the costs of carriage necessary to bring the goods to the destination.
CFR - Cost and Freight - The seller delivers the goods on board the vessel. The risk of loss of 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.
CIF - Cost, Insurance and Freight - The seller delivers the goods on board the vessel. The risk of loss of 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.
The seller also contracts for insurance cover against the buyer's risk of loss of or damage to the goods during the carriage. The seller is only required to obtain minimum insurance coverage. However, should the buyer wish to have more insurance protection, it will need either to agree with the seller or to make its own extra insurance arrangements.
CIP - Carriage and Insurance Paid To - The seller delivers the goods to the carrier or another person nominated by the seller at an agreed place. The seller must pay the costs of carriage to bring the goods to the destination. In addition, the seller is required to obtain minimum insurance coverage. Should the buyer wish to have more insurance protection, it will need either to agree with the seller or to make its own extra insurance arrangements.
DAT - Delivered At Terminal - The seller delivers when the goods are unloaded and are placed at the disposal of the buyer at a named terminal at the named port or place of destination. 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.
DAP - Delivered At Place - The seller delivers when the goods are placed at the disposal of the buyer on the arriving means of transport ready for unloading at the destination. The seller bears all risks involved in bringing the goods to the named place.
DDP - Delivered Duty Paid - The seller delivers the goods when the goods are placed at the disposal of the buyer, cleared for import on arrival and ready for unloading at destination. The seller bears all costs and risks involved in bringing the goods to destination and is obligated 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.
Incoterms allows the parties to designate a point at which the costs and risks of transport are precisely divided between the seller and the buyer. Incoterms also allocate responsibility for customsclearance/duties between the parties.
Since Incoterms are not law but are contractual standard terms, they do not apply to a given transaction unless the parties specifically incorporate them by referring to last version of Incoterms. The import policy of Bangladesh categorically endorse the incoterms to follow in international trade.
Incoterms are elements of the international sale contract, which may be derived from the seller´s tender or proforma invoice or Indent. Thus, Incoterms only apply to the seller and buyer, one of whom will assume dovetail with the Incoterms in terms of allocation of transport costs and risks, but this will depend on the shipper giving precise directions to the carrier to ship according to the constraints of the given Incoterms.
The writer is a legal economist.
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