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3. INCOTERMS

3.1 DEFINITION OF INCOTERMS

"International Commerce Terms", Incoterms, establish a set of international rules for

the interpretation of trade terms related to sales contracts. Thus, there is no room for
different interpretations of the trade terms by different countries.

They are used in risky transactions between buyers and sellers in order to reduce
possible legal complications. It should be mentioned that Incoterms do not regulate the
form of payment by the buyer. Furthermore, they cover only contracts for the sale of
goods, excluding service contracts.

3.2 ASPECTS INCORPORATED INTO THE INCOTERMS 2010

In the year 1936, the International Chamber of Commerce (ICC) published a series of
international standards whose purpose was to establish a common understanding of
the trade terms. Since then the ICC has published eight reviews to improve the
interpretation of these terms. The most widely used, over the past years, was the one
published in 2000. However, in 2010 a whole series of changes appeared and came into
force in January 2011 and are still applicable.

One needs to keep in mind that the Incoterms are not laws, they are rules. Therefore,
new updates do not repeal the previous ones, so it is very important to specify the
version being used in each contract.

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Features of INCOTERMS 2010:

✓ Reduction from 13 to 11 rules.

✓ The Incoterms DAF (Delivered at Frontier), DES (Delivered ExShip), DEQ

(Delivered ExQuality) and DDU (Delivered Duty Unpaid) are eliminated. DDP
(Delivered Duty Paid) is maintained and the following are created:

- DAT (Delivered at Terminal) the delivery is made at the destination
terminal.

- DAP (Delivered at Place) deliveries are being made in the destination

country in an agreed place and therefore allowing more flexibility.

✓ It places emphasis on increasing the use of electronic documents on any

platform.

✓ It recognizes new transport practices incorporated in the last decade.

3.3 CHARACTERISTICS OF INCOTERMS

The four points that the Incoterms establish are:

▪ The exact place where delivery of the goods takes place.

▪ The moment in which the goods are put at risk.

▪ The distribution of the costs of the operation.

▪ The distribution of documentary procedures.

The details that define the four points mentioned are listed below:

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1. Packing: the seller is responsible for good packing and proper labelling of his
merchandise.

2. Load of merchandise: this will be deposited in a truck, container or warehouse

according to the labour risks prevention regulations of the company where it is
loaded.

3. Inland Transport: this refers to the transfer of goods in the country of origin,
i.e. from the factory to the airport, port, cargo terminal or warehouse of the
carrier.

4. Customs export formalities: they refer to the formalities at the customs

export office. Among countries of the European Union the only thing needed is
filling in the Single Administrative Document (SAD). However, this formality is
not necessary in member countries of the customs union.

5. Handling costs: they originate in the delivery of the goods at the terminal of
origin, airport, port or railway station. They also include expenses associated
with handling and loading the goods onto the transport vehicle.

6. Insurance: there are three types of insurance according to the ICC. It is

classified into A, B and C and covers the goods during transport. However, if the
company already has global insurance which includes all risks; it is not necessary
to have another one. In case of accident both companies would only pay the full
amount of the loss in percentage.

With regard to this insurance, as a rule, it is almost always global insurance, since
all three types have a series of exceptions that need to be known.

Type A insurance covers all risks possible, except:

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- Wilful misconduct of the insured object.

- Leaks, spills and losses in the volume and/or weight due to the nature of
the thing.
- Loss or damage caused by inadequate packing or inadequacy of the
insured object.
- Inherent defect or intrinsic nature of the thing.
- Delays.
- Damage from nuclear devices.
- Unseaworthiness or unsuitability of the ship, when the insured person is
aware of it during the time of loading.
- War and its manifestations.
- Strike and its manifestations.
- Artefacts of war.
- Terrorism.


Risks excluded in type B insurance:

- Fire or explosion.
- Sinking, grounding and stranding of the carrier ship.
- Overturning or derailment of the terrestrial environment.
- Boarding.
- Unloading goods at the port of arrival.
- Earthquake, volcanic eruptions and lightning.
- General average sacrifices.
- Throwing and dragging by waves.
- Wetting.
- Rescue costs and contribution to general average.
- Total loss of packages in loading or unloading operations.

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Finally, the type C insurance policy excludes:

- Fire or explosion.
- Sinking, grounding and stranding of the carrier ship.
- Overturning or derailment of the Earth's environment.
- Boarding, carrier vehicle collisions may occur.
- Unloading goods at the port of arrival.
- General average sacrifices.
- Rescue costs and contribution to general average.

7. Handling costs: they are those associated with the destination terminal and
with unloading and handling from the vehicle that carries the merchandise to
the main means of transport.

8. Customs import formalities: they are necessary in order to carry out the
procedures for importing the goods. Each country has its own requirements. If
the documentation is not properly filled in, the products can be stopped at
customs. This involves very high costs for the company. Import documents
include the tariff and tax specifications. The documents, needed to complete the
formalities, are origin certificate, inspection certificate, etc.

9. Inland Transport: once the merchandise has reached the destination country,
the transport associated with the movement from the port, airport, etc. should
be taken into account.

10. Reception and unloading: finally, the merchandise has been transported to
the place of destination. This can be a warehouse, customs warehouse, factory,
etc. It is important to mention that the unloading must always be done by the
buyer.

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3.4 TYPES OF INCOTERMS

When speaking about the types of Incoterms, we need to consider the following four
groups:

▪ Group E: the seller puts goods at the buyer’s disposal, in his own premises or
factory.
▪ Group F: the seller is responsible for depositing the goods into a means of
transport chosen by the purchaser.
▪ Group C: the seller hires the transport without assuming risk of loss, damage of
the goods or additional costs after loading and unloading.
▪ Group D: the seller takes care of all the expenses and risks in order to bring the
goods to the destination country.
Let us now see in more detail what each of the groups implies.

3.5 GROUP E INCOTERMS

In this category there is only one possibility.

- EXW (Ex Works): the only requirements for the seller are to leave the goods at
the place and date indicated and to provide the correct packaging. In this way,
the seller is exempt from any responsibility for both, the loading of the goods
and the customs export formalities. The buyer is obliged to choose the means of
transport, which can be air, sea, road or rail. Also, the buyer needs to take the
responsibility for the costs associated with the transport and complaints.
This type of group is recommended for companies that lack adequate infrastructure and
personnel for the management of the most advanced logistics operations. It is suitable
for making offers of sale at a lower price since the cost associated with this Incoterm is
little more than the price of the merchandise. It is also important to note that it is

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basically used in the same country so that there are no problems with the customs
processes.

1.6 GROUP F INCOTERMS

In this group three subtypes can be differentiated. The features that they have in
common are:

▪ Delivery of the goods to the boarding point.

▪ It is the buyer who bears the costs of transport.
▪ It is the buyer who takes on the risk of the main transport.
Incoterms that form part of the group are:

- FCA (Free Carrier): the obligations of the seller are to deliver the goods to the
carrier chosen by the buyer and the indicated place, and to carry out the export
procedure.

The buyer is responsible for choosing the means of transport and the main
carrier. He also bears the costs and the risk of loss or damage to the goods from
the moment the carrier takes the responsibility until the place of unloading.

- FAS (Free Alongside Ship): refers to maritime transport. The main obligation of
the seller is to deliver the goods to the seaport, alongside the vessel. It excludes
the loading of the goods on board. If the goods suffer damage or loss, it is the
buyer who is responsible. For his part, the buyer has to choose the shipping
company, as well as pay and take on the risk of loss or damage to the goods from
the moment the seller delivers them to the side of the ship.
- FOB (Free On Board): this transport is also exclusively maritime transport. In this
case the seller, in addition to carrying the goods to the port of origin, takes the
cargo on board the ship chosen by the buyer. In this way, the obligation of the
purchaser is to designate and take charge of the costs of the vessel, unloading in
the country of destination, etc.

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3.7 GROUP C INCOTERMS

The Incoterms that form part of group C have in common the following characteristics:

▪ Delivery of the goods to the point of destination.

▪ It is the seller who chooses and pays for the transport.
▪ It is the buyer who bears the risk of the main transport.
In this group we can distinguish:

- CFR (Cost and Freight): it is maritime transport. In this case it is the seller who is
in charge of hiring the ship, as well as managing the export of the goods.

Moreover, the purchaser is the person who is financially responsible for the
additional costs or risk of loss or damage to the goods and taking out insurance
covering to the port of destination.

- CIF (Cost, Insurance and Freight): it is also characterized by maritime transport.

The seller is responsible for hiring the ship, loading and paying the freight
necessary to bring the goods to the port of destination. In addition, and unlike
the others, the seller is responsible for taking out an insurance policy for the
protection of the goods for a minimum amount of 110% of its value.

While it is the seller who pays the insurance, the goods travel at the buyer's risk,
who is the direct beneficiary of the insurance policy.

- CPT (Carriage Paid To): in this case you can use any means of transport: road,
rail, air or sea. It is the seller who hires and pays for the transport, as well as the
one responsible for exporting the merchandise.

The buyer's obligation is to take care of the risks related to the merchandise from
the point where the seller delivers it to the first carrier.

- CIP (Carriage and Insurance Paid): refers to any of the four modes of transport.
The seller hires and pays for the transport used to deliver the goods to an agreed

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destination. On the other hand, he is responsible for the export of goods and, in
contrast to CPT, takes out a protective insurance policy for a minimum amount
of 110%.

In this case he is only responsible for additional risks associated with the goods.

3.8 GROUP D INCOTERMS

The last group is characterised by the direct delivery on arrival. Its main features include:

▪ Delivery to the destination.

▪ The seller designates and pays for the transport.
▪ It is the seller who bears the risk of the main transport.
Incoterms that make up this group are:

- DAT (Delivered at Terminal): it refers to any mode of transport. First, a terminal

is designated at the place of destination. The obligation of the seller is to deliver
the goods unloaded from the means of transport. He also bears all the risks
involved in bringing the goods to the terminal.

For his part, the buyer bears the risk of loss or damage, but only when the goods
are delivered.

- DAP (Delivered at Place): it includes any mode of transport. The goods are
delivered to a place agreed with the buyer. The seller hires and pays for the
transport of goods to this place. He or she also takes the risks of loss or damage
up to the moment of delivery.

The buyer is only responsible for loss or damage once the merchandise has been
delivered to the agreed place.

- DDP (Delivered Duty Paid): it includes any mode of transport. It represents the
maximum obligation of the seller since the delivery is carried out in the country

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of the importer, including unloading. Not only should he or she take the export
into account, but also the import formalities.

Once again, the buyer only takes responsibility for losses or damages once the
merchandise has been delivered.

3.9 SELECTION CRITERIA

As we have seen, there are many Incoterms for an international trading operation.
Bearing this in mind, it is important to choose well so as not to take on too many
responsibilities or additional costs.

Below we have a series of criteria to consider when choosing the Incoterm:

- Size of the company: Obviously, large companies have more bargaining power
with transport operators. It is also influenced by the volume of the material to
be transported, although it is normally associated with the size of the company.

- Group C Incoterms: They are those of greater risk for the buyer, since they
transfer the ownership of the goods from the origin.

- Customer: Due to the large number of suppliers and their marketing campaigns,
the customer is looking for the seller who facilitates the purchase operation. This
means delivering the goods as close as possible to your company, warehouse,
etc.

- Country: In some countries there might be difficulties when it comes to transport

access or problems of an administrative nature. In this case, it is recommended
using short Incoterms to avoid overcharging.

The following table shows a comparison of the advantages and disadvantages of each
Incoterm in order to help select the most appropriate one in each sale.

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Chart 3

Operations Transport Delivery

EXW SHORT - the same country or free trade zone. Small and easy All Origin
to transfer merchandise.

FCA SHORT - for full factory loads. All Origin

FAS SHORT - on the dock of the port. Maritime Origin

FOB SHORT - goods loaded and stowed. One needs to bear non- Maritime Origin
elected transport port charges.

CFR LONG - the seller bears the cost of transport, but the risk is Maritime Origin
on the part of the buyer.

CIF LONG - The seller bears the cost of shipping and insurance. Maritime Origin
The risk is on the part of the buyer.

CPT LONG - The seller bears the cost of transport. All Origin

CIP LONG - The seller bears the cost of shipping and insurance. All Origin
The risk is on the part of the buyer.

DAT At the destination terminal. Be careful with poor All Destination

infrastructure.

DAP In the same economic zone. Buyer’s warehouse. All Destination

DDP Includes customs clearance of import, duties and taxes. All Destination
Small urgent operations.

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This table helps us come up with such basic questions as:

▪ Who can get a better price: the buyer or the seller?

▪ Who can get better terms of cargo insurance?

▪ Does the buyer require a deadline for the delivery of the goods?

▪ Does either of the two countries, of origin or destination, have customs

problems?

Below you will find an outline of the eleven Incoterms which clearly shows the scope
and risk taken by each party in the carriage of the goods.

Figure 3

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