Freight incoterms updated
Before you enter into an agreement about how you are going to deliver goods to an overseas buyer, make sure the terms are appropriate for your situation.
Terms for delivering freight are covered by guidelines first formalised by the International Chamber of Commerce in 1936 and called incoterms (short for international commercial terms). Many of these were based on expressions used since the 1800s, with the result that some of them are out of date and no longer legally meaningful.
For example, did you know that ‘free on board’ (FOB) is an expression that refers to cargo carried loose, on men’s shoulders and backs, across the rail of a sailing ship? What it doesn’t refer to is containerised transport, even by sea, and what it means is that the buyer is responsible for the goods up until they are onboard ship.
Incoterms themselves are not legally binding but they become so when they are used in a contract of sale where they are used to specify at what point the responsibility for the goods transfers from the seller to the buyer. Since incoterms define the limits of the seller’s responsibility, and the costs involved, it’s important to use them correctly when brokering a contract that covers delivery of the goods.
“Ninety-nine point nine percent of people haven’t got a clue about incoterms and don’t even know there is any sort of written definition of those terms,” says Bob Ronai, director of Import-Export Services, NSW and member of the ICC’s incoterms advisory committee. “They just take a punt and use a term because somebody told them that’s the one to use.”
Ronai attended the launch of the updated Incoterms 2010 held in Paris on 27 September, along with delegates from 49 other countries. The updated terms come into effect from 1 January 2011, with some of the old terms disappearing and others melded into a single more appropriate term. Ronai believes this is long overdue. “When containers came into use in international freight in the late sixties it changed the whole concept, but everybody is still using outdated terms,” he says.
Incoterms decoded
Incoterms can be divided into four groups: E terms which cover departure, F terms where the main carrying is not paid by the seller, C terms where the main carrying is paid by the seller and D terms which relate to delivery.
EXW stands for ex works and is only really appropriate for intra country or trading block freight.
FCA (free carrier), FAS (free alongside ship) and FOB (free on board) define where the seller’s responsibilities end in the seller’s country.
CFR (cost and freight), CIF (cost insurance freight), CPT (carriage paid) and CIP (carriage insurance paid to) refer to the limit of the seller’s financial liability for transport to destination.
DAF (delivered at frontier), DES (delivered ex ship), DEQ (delivered ex quay), DDU (delivered duty unpaid) and DDP (delivered duty paid) are where the seller is financially liable for risk and transport to the destined country.
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