Incoterms: International Trade and Paid by Seller Essay

Legal Aspects in Management ———————————————————————— Project Report On INTERNATIONAL COMMERCIAL TERMS & THEIR RELEVANCE/EVALUATION ———————————————————————— Submitted to: Prof C. L. Bansal Submitted By: Group No. 9 | Section F Anunay Bhargava| PGP 26328| Arnab Chowdhury| PGP 26329| Chinmay Desai| PGP 26334| Devendra Singh| PGP 26337| Gaurav Bhuwania| PGP 26341| Saurabh Yadav| PGP 26365|

Srivalson Nair| PGP 26371| | | Date of Submission: 10th September 2010 Table of Contents INTERNATIONAL CHAMBER OF COMMERCE (ICC)3 INCOTERMS4 The ‘E’ Term (no obligation for the seller)5 Responsibility Chart5 EXW – Ex Works, named place6 The ‘F’ Terms (Main Carriage Not Paid By Seller)7 FCA (Free Carrier)7 FAS – Free Alongside Ship,8 FOB – Free On Board8 Important Judgements9 The ‘C’ Terms (Main Carriage Paid By Seller)9 CIF – Cost, Insurance & Freight, named ocean port of destination10

CFR – Cost & Freight, named port of destination11 CPT – Carriage Paid To, named place of destination12 CIP – Carriage and Insurance Paid To, named place of destination12 The ‘D’ Terms (Arrival)13 DES – Delivered Ex Ship, named port of destination13 DEQ – Delivered Ex Quay, named port of destination14 DDU – Delivery Duty Unpaid, named place of destination14 DDP – Delivery Duty Paid, named place of destination15 INCOTERMS 2000 – A Summary17 EVALUATIONError! Bookmark not defined. INTERNATIONAL CHAMBER OF COMMERCE (ICC)

The ICC was founded in 1919 with an overriding aim to serve world business by promoting trade and investment, open markets for goods and services, and the free flow of capital. ICC is the voice of world business championing the global economy as a force for economic growth, job creation and prosperity. ICC activities cover a broad spectrum, from arbitration and dispute resolution to making the case for open trade and the market economy system, business self-regulation, fighting corruption or combating commercial crime.

All the activities of the International Chamber of Commerce, whether of a policy or technical nature, aim: * To promote international trade, services and investment, while eliminating obstacles and distortions to international commerce * To promote a market economy system based on the principle of free and fair competition among business enterprises * To foster the economic growth of developed and developing countries alike, particularly with a view to better integrate all countries into the world economy ICC has direct access to national governments all over the world through its national committees.

The organization’s Paris-based international secretariat feeds business views into intergovernmental organizations on issues that directly affect business operations. The ICC has permanent observer status with the United Nations. The UN, the World Trade Organization, and many other intergovernmental bodies, both international and regional, are kept in touch with the views of international business through ICC. Member companies and business associations shape ICC’s stance on any given business issue by participating in the work of ICC commissions.

Commissions are the bedrock of ICC, composed of a total of more than 500 business experts who give freely of their time to formulate ICC policy and elaborate its rules. ICC makes policies in the following: * Anti-Corruption * Arbitration * Banking Technique and Practice * Business in Society * Commercial Practice * Competition * Customs and Trade Regulations * E-business, IT and Telecoms * Environment and Energy * Financial Services and Insurance * Intellectual Property * Marketing and Advertising * Taxation Trade and Investment Policy * Transport and Logistics INCOTERMS ICC’s International Commercial Terms (INCOTERMS) is a universally recognized set of definitions of international trade terms and is widely used in international commercial transactions. These are accepted by governments, legal authorities and practitioners worldwide for the interpretation of most commonly used terms in international trade. This reduces or removes altogether uncertainties arising from different interpretation of such terms in different countries.

Scope of INCOTERMS is limited to matters relating to rights and obligations of the parties to the contract of sale with respect to the delivery of goods sold. They are used to divide transaction costs and responsibilities between buyer and seller and reflect state-of-the-art transportation practices. Being standard international trade definitions, INCOTERMS are used every day in thousands of contracts. ICC model contracts thus make life easier for small companies that cannot afford big legal departments. ICC first introduced the INCOTERMS standard commercial terms in 1936.

Representing a radically new concept in an industry regulated by local rules of law, the new terms were the first real attempt to bring coherence to a commercial and judicial system that diverged widely from one country to another. Since they were first introduced, the INCOTERMS rules have been revised about once a decade to keep up with the rapid expansion of world trade and globalization. The last revision was done in 2000. INCOTERMS regulate| INCOTERMS do not regulate| Delivering and taking delivery of goods| Transfer of ownership| Division of costs| The payment process|

It applies to goods available only at the seller’s premises. Seller’s Obligations Delivery – The seller must place the goods at the disposal of the buyer at the named place of delivery, not loaded on any collecting vehicle. Risk – The seller must bear all risks of loss of or damage to the goods until such time as they have been delivered. Costs – The seller must pay all costs relating to the goods until such time as they have been delivered. Notices – The seller must give the buyer sufficient notice as to when and where the goods will be placed at his disposal.

FCA Seller’s Premises * The seller is responsible only for loading the goods and not responsible for inland freight; * Delivery is complete when the goods are loaded on the Buyer’s collecting vehicle * Risk is transferred from the Seller to the Buyer when the goods are loaded on the Buyer’s vehicle FCA Named Place (International Carrier) * The seller is responsible for inland freight * Delivery is complete when the goods are placed at the disposal of the buyer not unloaded from the seller’s vehicle * Risk is transferred from the Seller to the Buyer when the goods have been delivered to the Buyer’s carrier at the named place.

Other variations of FCA in practice are FOT (Free on Truck) & FOR (Free on Rake). FAS – Free Alongside Ship, named ocean port of shipment (e. g. FAS Kandla) Used for goods those are not containerized. Goods are placed in the dock shed or at the side of the ship in barges, within the reach of its loading equipment so that they can be loaded aboard the ship. Risk is transferred from the Seller to the Buyer when the goods have been placed alongside the Buyer’s nominated Vessel/Ship at the named port of shipment. For Example – For bulk coal shipments, the Seller places oaded barges alongside the Buyer’s nominated Vessel. The coal is then loaded into the vessel at the cost of the Buyer i. e. the Stevedores and the loading equipment costs are borne by the Buyer. FOB – Free On Board, named ocean port of shipment (e. g. FOB Dahej) The goods are delivered by the Seller on-board the Buyer’s nominated Vessel at the ocean port of shipment. It is the Seller’s responsibility to load the goods on the vessel i. e. the cost incurred in loading the cargo are borne by the Seller but the Freight is to the Buyer’s account.

The Stevedores at the Port of Loading are appointed by the Seller. Seller’s Obligations Delivery – Seller must deliver the goods on board the ocean ship; Costs & Risk – All costs and risks of loss or damage to the goods pass from the Seller to Buyer when the goods pass the ship’s rail at the named port of shipment. Proof of Delivery, Transport Document or Equivalent Electronic Message – Seller must provide to the Buyer a a clean, on board Bill of Lading after loading. Buyer’s Obligations

Delivery – Buyer must nominate to the Seller an ocean ship in proper condition so as to load the goods; Costs ; Risks – Bear all costs and the risk of loss or damage to the goods from the time they have passed the ship’s rail at the named port of shipment. Under the INCOTERMS 1990, the term FOB is used for ocean freight only. However, in practice, many importers and exporters still use the term FOB in the air freight. Important Judgements ————————————————- B. K. Wadeyar vs M/S. Daulatram Rameshwarlal on 27 September, 1961 ————————————————-

The respondents firm claimed exemption from Sales Tax under Art. 286(i)(b) of the Constitution in respect of sales made by them of cotton and castor oil on the ground that the sales were on F. O. B. contracts under which they continued to be the owners of the goods till those crossed the custom barrier and entered the export stream. ————————————————- Held, that the goods remained the seller’s property till those had been brought and loaded on board the ship and so the sales were exempted from tax under Art. 286(i) of the Constitution.

This term may be used for any mode of transport including multimodal transport. CIF – Cost, Insurance & Freight, named ocean port of destination CIF price includes cost of goods, insurance and freight charges. Under this the seller insures the goods and delivers them to a shipping company for being sent to the buyer. This term can only be used for sea and inland waterway transport. Seller’s Obligations Delivery – The Seller must deliver the goods at the destination port. The seller must procure a Contract of Afreightment i. e. o make a contract with a shipping company for the transportation of goods and to obtain a bill of lading. The seller obtain an insurance policy on such current terms as will benefit the buyer Risk – The risk passes from seller to the buyer the moment the goods pass the ship’s rail at the named port of shipment Cost – The costs are transferred from the seller to the buyer at the named port of destination. Notices – The Seller must deliver the shipping documents i. e. the invoice, bill of lading and insurance policy to the buyer within reasonable time and at a place mentioned in the contract.

In case no place is mentioned in the contract these must be delivered at a place as per agreed in the contract. If the shipping document is not delivered within a reasonable time the seller shall be guilty of breach of contract. Buyer’s obligations Delivery –The Buyer must take the delivery at the named destination port. Risk – The buyer must bear the risk once the goods pass the ship’s rail at the named port of shipment. Cost – The cost is transferred to the buyer at the port of destination. Notices – The buyer receives the shipping documents and pays the price regardless of arrival and possession.

He cannot refuse to pay on grounds that he has not examined the goods. He must pay even if he knows that the goods have been destroyed during transit. In such case, his remedy lies against the insurer. The buyer must also pay the unloading charges, the customs and the import duties. The buyer can refuse to take the shipping document in the following cases. * Invalidity of documents such as when the lading bill is not correctly dated. * The shipped goods being of a different quality. * Shipped quantity being less than contracted for. Some important points Transfer of ownership: The ownership of the goods is transferred to the buyer when the shipping documents are delivered to the buyer who receives them by paying the price. On buyer’s refusal to take the shipping documents the seller can claim damage for breach. But the parties may vary the terms of the C. I. F contract and in that case, ownership is transferred in accordance with the intention of the parties. * Protection of parties’ interest: The seller is protected since he continues to be the owner until the buyer pays for them.

The buyer is protected as he has to make payment only when the document is delivered to him. The buyer can obtain delivery as soon as they reach the destination. In case the goods are lost during transit, the claim can be filed with the insurance company. * Nature of C. I. F contracts: A C. I. F. contract is not a contract of sale of document. A C. I. F. contract contemplates transfer of actual goods in the normal course and if the goods are lost, the insurance policy and the bill of lading provide rights that taken to be equivalent of goods. CFR – Cost & Freight, named port of destination

The delivery of goods to the named port of destination (discharge) is at the seller’s expense. Buyer is responsible for the cargo insurance and other costs and risks. The term CFR was formerly written as C;F. Many importers and exporters worldwide still use the term C;F. Under the INCOTERMS 1990, the term Cost and Freight is used for ocean freight only. However, in practice, the term Cost and Freight (C;F) is still commonly used in the air freight. CPT – Carriage Paid To, named place of destination The seller pays the freight for the carriage of the goods to the named destination.

The risk of loss of or damage to the goods, as well as any additional costs due to events occurring after the time the goods have been delivered to the carrier is transferred from the seller to the buyer when the goods have been delivered into the custody of the carrier. Seller’s Obligations * Pay the freight charges for the carriage to the destination * Bear all costs and risks of loss or damage to the goods until they have been passed to the carrier. * Clear the goods for export. * The seller must provide the buyer, upon request, with the necessary information for procuring insurance.

Buyer’s Obligations * Clear the goods for import * Bear all the unloading costs at the destination * The buyer must pay all costs and charges incurred by the seller to obtain the above information Risk is transferred from the Seller to the Buyer when the goods have been delivered to the carrier. CIP – Carriage and Insurance Paid To, named place of destination The seller pays for the delivery of goods and the cargo insurance to the named place of destination. Buyer assumes the import customs clearance, payment of customs duties and taxes, and other costs and risks.

Seller’s Obligation * Pay the freight and cargo insurance premium charges for the carriage to the destination * Bear all costs and risks of loss or damage to the goods until they have been passed to the carrier. * Provide the buyer with transport documents that will allow the buyer to take possession of the goods at the agreed point in the named port of destination. Buyer’s Obligation * Clear the goods for import * Bear all the unloading costs at the destination It is the seller’s responsibility to purchase insurance only on minimum cover.

In Delivered Ex Ship, the sellers or the exporters/manufacturers clears the goods for export and is responsible for making them available to the buyer on board the ship at the named port of destination, not cleared for import. The seller is thus responsible for all costs of getting the goods to the named port of destination prior to unloading. The DES term is used only for shipments of goods by ocean or inland waterway or by multimodal transport where the final delivery is made on a vessel at the named port of destination. All forms of payment are used in DES transactions.

DEQ – Delivered Ex Quay, named port of destination In Delivered Ex Quay, the seller/exporter/manufacturer clears the goods for export and is responsible for making them available to the buyer on the quay (wharf) at the named port of destination, not cleared for import. The buyer, therefore, assumes all responsibilities for import clearance, duties, and other costs upon import as well as transport to the final destination. This is new for INCOTERMS 2000. The DES term is used only for shipments of goods arriving at the port of destination by ocean or by inland waterway.

All forms of payment are used in DEQ transactions. Seller’s Obligations * The seller must provide the goods and the commercial invoice, or its equivalent electronic message, in conformity with the contract of sale. * Contract of carriage – The seller must contract at its own expense for the carriage of the gods to the named quay (wharf) at the named port of destination. If a specific quay (wharf) is not agreed or is not determined by practice, the seller may select the quay (wharf) at the named port of destination which best suits its purpose. * Contract of insurance – No obligation. The seller must place the goods at the disposal of the buyer on the quay (wharf) referred to in or on the date or within the agreed period Buyer’s Obligations * The buyer must pay the price as provided in the contract of sale. * The buyer must obtain at its own risk and expense any import licence or official authorisation or other documents and carry out, where applicable, all customs formalities necessary for the import of the goods. * The buyer must pay the costs of any pre-shipment inspection except when such inspection is mandated by the authorities of the country of export. DDU – Delivery Duty Unpaid, named place of destination

Delivery Duty Unpaid (DDU) is used for transactions where the seller is responsible for delivering the goods to the buyer at the named place of destination but not cleared for import. The seller bears all the costs involved in delivering the goods to the destination except the unloading costs from any means of transport used to carry the goods to the named place of destination as well as the import duty, if any, in the country of the destination. The buyer bears the import duty costs as well as the costs and risks associated with his failure to clear the goods for import as per schedule.

DDU is used irrespective of the mode of transport. But when the delivery is to be made in a port on board a vessel or quay, the DES and DEQ terms are used. The seller does not assume any costs or risks associated with transporting the goods to any other final destination from the named place of destination. Seller’s Obligations Delivery – The seller must place the goods at the disposal of the buyer on the quay (wharf) on the date or within the agreed period. Transfer of Risks – The seller must bear all risks of loss of or damage to the goods until such time as they have been delivered.

Proof of Delivery, Transport Document or Equivalent Electronic Message – The seller must provide the buyer at the seller’s expense with the delivery order and/or the usual transport document (for example a negotiable bill of lading, a non-negotiable sea waybill, an inland waterway document or a multimodal transport document) to enable it to take the goods and remove them from the quay (wharf). Where the seller and the buyer have agreed to communicate electronically, the document referred to in the preceding paragraph may be replaced by an equivalent electronic data interchange (EDI) message

Buyer’s Obligations Delivery – The buyer must take delivery of the goods when they have been delivered Transfer of Risks – The buyer must bear all risks of loss of or damage to the goods from the time they have been delivered. Proof of Delivery, Transport Document or Equivalent Electronic Message – The buyer must accept the delivery order or the transport document. DDP – Delivery Duty Paid, named place of destination Delivery Duty Paid is used for transactions where the seller is responsible for delivering the goods to the buyer at the named place of destination after clearing it through imports.

Thus, the seller taxes and other charges required for import in the country of destination. Hence, DDP should not be used if the seller doesn’t have the capability to get an import license. The DDP represents the maximum obligation for the seller as he is responsible for all the costs associated with getting the goods to the named place of destination. The two contracting parties can change these obligations by mentioning the exact requirements in the contract. The term may be used for all types of transports, except when delivery takes place on board a vessel or quay in the port of destination.

Seller’s obligations Delivery – The seller must place the goods at the disposal of the buyer or at that of another person named by the buyer, on any arriving means of transport not unloaded at the named place of destination on the date or within the period agreed for delivery. Transfer of Risks – The seller must, subject bear all risks of loss of or damage to the goods until such time as they have been delivered in accordance with his obligations as a deliverer. Proof of Delivery, Transport Document or Equivalent Electronic Message – The eller must provide the buyer at the seller’s expense with the delivery order and/or the usual transport document which the buyer may require to take delivery of the goods. Where the seller and the buyer have agreed to communicate electronically, the document referred to in the preceding paragraph may be replaced by an equivalent electronic data interchange (EDI) message. Buyer’s obligations Delivery – The buyer must take delivery of the goods when they have been delivered. Transfer of Risks – The buyer must bear all risks of loss of or damage to the goods from the time they have been delivered.

The buyer must, should it fail to fulfil its obligations, bear all additional risks of loss of or damage to the goods incurred thereby. Proof of Delivery, Transport Document or Equivalent Electronic Message – The buyer must accept the delivery order or the transport document. ————————————————- Misuse of the DDP shipment procedure: When a customer purchases goods from foreign countries, the domestic company which imports the goods from abroad is usually either affiliated to or a subsidiary of the exporting manufacturing firm.

This introduces the possibility of misstating the real value of the goods at the time of import so that the duty on those items is reduced. The importing company then sells the goods off to the real customer at a much higher actual value. The Customs officials are slowly becoming aware of this practice and are denying the importing middle man the right to clear the goods stating that the title never passed to the importer and that the customer was the real owner of those goods. INCOTERMS 2000 – A Summary

Areas of Improvement We found that there are certain areas which if covered under the INCOTERMS would reduce the potential conflicts faced in International Business. They are listed as per below:- Availability of Safe Birth/Port When the sale is on FOB terms, the Buyer nominates the carrying vessel to the Seller and the Seller loads the goods onboard the nominated vessel. It is nowhere mentioned that it would be the Seller’s responsibility to provide a safe birth/anchorage to the Buyer’s vessel.

If it happens that there is some problem with the birth and the vessel owner refuses to load the cargo on the vessel, then a conflict might arise as to who would assume the demurrage losses unless such a term is expressly agreed in the contract of sale. Same thing applies to the Buyer in case of CIF or CFR purchases. Such a clause can be made a part of the INCOTERM itself by default, so as to avoid any confusion. Transfer of Title The INCOTERMS do not deal with how and when the title would be transferred to the Buyer. The Title in all the above arrangements under INCOTERMS is transferred to the Buyer depending on the contractual terms.

The commonly used practice being the transfer of title once the Seller receives the full payment from the Buyer. References * http://www. iccwbo. org/incoterms/wallchart/wallchart. pdf * http://www. zurich. ch/site/pool/fkmu. Par. 0053. LangItems. en. File. tmp/Incoterm_2000_E_global. pdf * http://www. uncitral. org/pdf/english/texts_endorsed/INCOTERMS2000_e. pdf * http://www. i-b-t. net/incoterms. html * http://www. export911. com/e911/export/comTerm. htm#xFCA * http://www. unece. org/cefact/recommendations/rec05/rec05_ecetrd259. pdf

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