In Part 1 of the Incoterms® 2010 – An Analysis, we looked at the Incoterms® for use with any mode of transport.. Here in Part 2 we will look at the terms used for Maritime only and also some Important Pointers..
This is Part 2 of a guest post written by David Murray, Director of Product Development, WheelSky Logistics, Inc who says
“Incoterms are largely misunderstood by most freight forwarders, as they normally are not involved with them directly. Shippers and Consignees MUST understand Incoterms and avoid just arbitrarily choosing FOB or EXW for shipments for which those Incoterms are not appropriate.
The below article just briefly touches on the definitions of the terms. Books have been written about their interpretation and recommended use. Later, I can provide you with some other articles that focus on one Incoterm at a time.”
2. MARITIME-ONLY TERMS
• FAS – FREE ALONGSIDE SHIP (… named port of shipment)
The Seller delivers the goods to the origin port. From that point, the Buyer bears all costs and risks of loss or damage.
• FOB – FREE ON BOARD (… named port of shipment)
The Seller delivers the goods on board the ship and clears the goods for export. From that point, the Buyer bears all costs and risks of loss or damage.
• CFR – COST AND FREIGHT (… named port of destination)
The Seller clears the goods for export and pays the costs of moving the goods to destination. The Buyer bears all risks of loss or damage.
• CIF – COST INSURANCE AND FREIGHT (… named port of destination)
The Seller clears the goods for export and pays the costs of moving the goods to the port of destination. The Buyer bears all risks of loss or damage. The Seller, however, purchases the cargo insurance.
- If you use Incoterms® in the Sales Contract or Purchase Order, you should identify the appropriate Incoterm Rule [e.g. FCA, CPT, etc.], be sure to state “Incoterms® 2010” and specify the place or port as precisely as possible.
RECOGNIZE WHERE THE RISK OF LOSS TRANSFERS:
- A common misconception when the Seller pays the freight is that the Seller has the risk of loss until the goods are delivered to the place or port specified on the bill of lading or airway bill. Actually, when using Incoterms® CPT, CIP, CFR or CIF, risk transfers to the Buyer when the Seller hands the goods over to the carrier at origin, not when the goods reach the place or port of destination.
- Understand that under CIP and CIF, the Seller is only obliged to obtain insurance up to the point where their risk of loss passes to the Buyer.
UNDERSTAND WHO HAS RESPONSIBILITY FOR LOADING AND UNLOADING CHARGES. FOR EXAMPLE:
- DAT obliges the Seller to place the goods at the Buyer’s disposal after unloading at the named terminal at port or place of destination.
- DAP obliges the Seller to place the goods at the Buyer’s disposal on the delivering carrier ready for unloading at the named place of destination.
- CPT, CIP, CFR or CIF on the other hand, require the parties to identify as precisely as possible the point at the agreed port of destination because the costs up to that point are for the account of the Seller.
UNDERSTAND WHO HAS RESPONSIBILITY FOR CUSTOMS ENTRY DECLARATIONS (USA):
- DDP is the only Incoterm where the Seller has responsibility for U.S. Customs entry declarations.
IMPORTANT NOTE: An important factor to be considered when asking the Seller to be responsible for international carriage is if the goods ship by Ocean Freight, an Importer Security Filing (ISF) must be electronically submitted to U.S. Customs 24 hours before the cargo is laden on the vessel bringing the cargo to the U.S.
The Buyer should specify in the contract either (a) the shipper is responsible for the ISF or (b) the Seller is responsible for providing the required data in a timely manner (i.e. 72 hrs before lading) to the Buyer’s appointed agent (e.g. Customs Broker).
When the Customs Broker and the international forwarder are unrelated parties, this requirement is honored more in the breach than in the observance. The Buyer should indemnify against the penalties (US$5,000) for filing a late, inaccurate or incomplete ISF.
The ISF does not apply at this time to airfreight shipments.
DETERMINE THE IMPORTANCE OF SUPPLY CHAIN VISIBILITY
- When CPT, CIP, CFR or CIF are used the Seller fulfills its obligation to deliver when it hands the goods over to the carrier, not when the goods reach the place of destination.