International Commercial Terms (INCOTERMS) BY RAMGOPAL
The INCOTERMS (International Commercial Terms) is a universally recognized set of definitions of international trade terms, such as FOB, CFR and CIF, developed by the International Chamber of Commerce (ICC) in Paris, France. It defines the trade contract responsibilities and liabilities between buyer and seller. It is invaluable and a cost-saving tool. The exporter and the importer need not undergo a lengthy negotiation about the conditions of each transaction. Once they have agreed on a commercial term like FOB, they can sell and buy at FOB without discussing who will be responsible for the freight, cargo insurance, and other costs and risks.
The INCOTERMS was first published in 1936---INCOTERMS 1936---and it is revised periodically to keep up with changes in the international trade needs. The complete definition of each term is available from the current publication---INCOTERMS 2000. The publication is available at your local Chamber of Commerce affiliated with the International Chamber of Commerce (ICC).
Many importers and exporters worldwide are accustomed to and may still use the INCOTERMS 1980, the predecessor of INCOTERMS 1990 and INCOTERMS 2000.
Under the INCOTERMS 2000, the international commercial terms are grouped into E, F, C and D, designated by the first letter of the term (acronym), as follows:
International Commercial Terms( INCOTERMS )
GROUP
TERM
Stands for
E
EXW
Ex Works
F
FCA
Free Carrier
FAS
Free Alongside Ship
FOB
Free On Board
C
CFR
Cost and Freight
CIF
Cost, Insurance and Freight
CPT
Carriage Paid To
CIP
Carriage and Insurance Paid To
D
DAF
Delivered At Frontier
DES
Delivered Ex Ship
DEQ
Delivered Ex Quay
DDU
Delivered Duty Unpaid
DDP
Delivered Duty Paid
In practice, trade terms are written with either all upper case letters (e.g. FOB, CFR, CIF, and FAS) or all lower case letters (e.g. fob, cfr, cif, and fas). They may be written with periods (e.g. F.O.B. and c.i.f.).
In international trade, it would be best for exporters to refrain, wherever possible, from dealing in trade terms that would hold the seller responsible for the import customs clearance and/or payment of import customs duties and taxes and/or other costs and risks at the buyer's end, for example the trade terms DEQ (Delivered Ex Quay) and DDP (Delivered Duty Paid). Quite often, the charges and expenses at the buyer's end may cost more to the seller than anticipated. To overcome losses, hire a reliable customs broker or freight forwarder in the importing country to handle the import routines.
Similarly, it would be best for importers not to deal in EXW (Ex Works), which would hold the buyer responsible for the export customs clearance, payment of export customs charges and taxes, and other costs and risks at the seller's end.
EXW ( the named place)Ex Works
Ex means from. Works means factory, mill or warehouse, which is the seller's premises. EXW applies to goods available only at the seller's premises. Buyer is responsible for loading the goods on truck or container at the seller's premises, and for the subsequent costs and risks.
In practice, it is not uncommon that the seller loads the goods on truck or container at the seller's premises without charging loading fee.
In the quotation, indicate the named place (seller's premises) after the acronym EXW, for example EXW Kobe and EXW San Antonio.
The term EXW is commonly used between the manufacturer (seller) and export-trader (buyer), and the export-trader resells on other trade terms to the foreign buyers. Some manufacturers may use the term Ex Factory, which means the same as Ex Works.
FCA ( the named point of departure)Free Carrier
The delivery of goods on truck, rail car or container at the specified point (depot) of departure, which is usually the seller's premises, or a named railroad station or a named cargo terminal or into the custody of the carrier, at seller's expense. The point (depot) at origin may or may not be a customs clearance center. Buyer is responsible for the main carriage/freight, cargo insurance and other costs and risks.
In the air shipment, technically speaking, goods placed in the custody of an air carrier are considered as delivery on board the plane. In practice, many importers and exporters still use the term FOB in the air shipment.
The term FCA is also used in the RO/RO (roll on/roll off) services.
In the export quotation, indicate the point of departure (loading) after the acronym FCA, for example FCA Hong Kong and FCA Seattle.
Some manufacturers may use the former terms FOT (Free On Truck) and FOR (Free On Rail) in selling to export-traders.
FAS ( the named port of origin)Free Alongside Ship
Goods are placed in the dock shed or at the side of the ship, on the dock or lighter, within reach of its loading equipment so that they can be loaded aboard the ship, at seller's expense. Buyer is responsible for the loading fee, main carriage/freight, cargo insurance, and other costs and risks.
In the export quotation, indicate the port of origin (loading) after the acronym FAS, for example FAS New York and FAS Bremen.
The FAS term is popular in the break-bulk shipments and with the importing countries using their own vessels.
FOB ( the named port of origin)Free On Board It constitute the following:-
Ex-work price
packing charges
inland transportation cost
Wharfage porterage
Customs dues
Export duty, if any.
Cost of checking operations like checking of quality, measure, weight or quantity, if any.
FOB price actually comprises FOB port town plus charges incidental to actual shipment of goods but minus ocean fright and marine insurance charges. This quotation is very common in case where goods are exported through Export House and merchant exporters as also to such overseas customers in whose country import duty is charged on FOB Value at the port of shipment.
FOB transactions are carried out on a “mixed contract” basis, which implies that ‘exporter would base his quotation and costing on FOB basis but in addition act on behalf of his customer in arranging shipment, procuring the bill of lading and also arranging insurance.
The term i.e. FOB (named port of shipment) can only be used for sea or inland waterway transport . When the ship’s rail serves no practical purpose, such as in the case of “roll-off or container traffic, the FCA term is more appropriate.
CFR ( the named port of destination)Cost and Freight
CFR means the seller (exporter) must pay the cost and fright necessary to bring the goods to the named port of destination (and not departure or loading) but the risk of loss or dames to the goods, as well as any additional costs due to events occurring after the time the goods have been delivered on board the vessel, is transferred from the seller to the buyer when the goods pass the ships rail in the port of shipment. It requires the seller to clear the goods for export.
This term can also be used for sea and inland waterway transport. When the ship’s rail serves no off or container traffic, the CPT term in more appropriate to use.
It is equivalent to the term “C&F” used normally
CIF ( the named port of destination)Cost, Insurance and Freight
It is most commonly used in export transactions, includes FOB price plus cost of ocean freight and marine insurance, up to the port of destination. In CIF quotation, care must be taken to state the name of the port to which the goods are intended to be shipped .However, if the “CIF price is applicable all over the world, the quotation should be “CIF Main Port”.
CIF does not, however, include any charges for unloading the goods or for import duties, if any, in the country of importation .It is the preferred type of quotation because the importer can know what exactly the goods will cost him at his port. Moreover, it means fewer responsibilities for him because it is the export who takes all risks for fluctuations in ‘rates of insurance and freight, unless otherwise specified in the export contract’.
Thus, it is CFR plus marine insurance against the buyer’s risk of or damage to the goods during the carriage. The seller contracts for insurance and pays the insurance premium. It can only be used for sea and inland waterway transport. When the ship’s rail serves no practical purposes such as in the case of roll-on /roll-off or container traffic, the CIP term is more appropriate to use.
CIF³ & c
Cost, Insurance and Freight & commission
In this type of quotation, besides cost, insurance and freight, commission charged by a middleman, if any, is included in the price. It may also include the commission of the exporter which he may charge the buyer (importer) while acting on his behalf.
The small letter ‘c’ must, therefore, be explained clearly in the export quotation/contract as it may sometimes relate to the commission of the import agent.
CIF &C³ or FOB & C³
These are quoted where the exporter assumes the risk of exchange fluctuations that may occur between the date of contract acceptance and payment.
CIF & c & I³
The word’c’ & ‘I’ in this quotation stands for commission & interest and, hence, it makes clear to the buyer that bank’s interest and commission are payable by him. This type of quotation is used when export is affected to distant places in which case the settlement of the bill of exchange drawn on the importer takes some time.
CIF ex³
It includes cost, insurance, freight and exchange. The expression ‘exchange’ is, however, ambiguous in this type of quotation. Sometimes, it refers to the banker’s commission or charge and sometimes to exchange fluctuations. When it refers to exchange fluctuation , it means that the purchase price is not affected by the subsequent rise or fall of the agreed currency of payment between the exporter and the importer.
CPT ( the named place of destination)Carriage Paid To
The delivery of goods to the named place of destination (discharge) at seller's expense. Buyer assumes the cargo insurance, import customs clearance, payment of customs duties and taxes, and other costs and risks.
In the export quotation, indicate the place of destination (discharge) after the acronym CPT, for example CPT Los Angeles and CPT Osaka.
CIP (the named place of destination)Carriage and Insurance Paid To
The delivery of goods and the cargo insurance to the named place of destination (discharge) at seller's expense. Buyer assumes the import customs clearance, payment of customs duties and taxes, and other costs and risks.
In the export quotation, indicate the place of destination (discharge) after the acronym CIP, for example CIP Paris and CIP Athens.
DAF ( the named point at frontier)Delivered At Frontier
The delivery of goods to the specified point at the frontier at seller's expense. Buyer is responsible for the import customs clearance, payment of customs duties and taxes, and other costs and risks.
In the export quotation, indicate the point at frontier (discharge) after the acronym DAF, for example DAF Buffalo and DAF Welland.
DES ( the named port of destination)Delivered Ex Ship
The delivery of goods on board the vessel at the named port of destination (discharge), at seller's expense. Buyer assumes the unloading fee, import customs clearance, payment of customs duties and taxes, cargo insurance, and other costs and risks.
In the export quotation, indicate the port of destination (discharge) after the acronym DES, for example DES Helsinki and DES Stockholm.
DEQ ( the named port of destination)Delivered Ex Quay
The delivery of goods to the quay (the port) at destination at seller's expense. Seller is responsible for the import customs clearance and payment of customs duties and taxes at the buyer's end. Buyer assumes the cargo insurance and other costs and risks.
In the export quotation, indicate the port of destination (discharge) after the acronym DEQ, for example DEQ Libreville and DEQ Maputo.
DDU (the named point of destination)Delivered Duty Unpaid
The delivery of goods and the cargo insurance to the final point at destination, which is often the project site or buyer's premises, at seller's expense. Buyer assumes the import customs clearance and payment of customs duties and taxes. The seller may opt not to insure the goods at his/her own risks.
In the export quotation, indicate the point of destination (discharge) after the acronym DDU, for example DDU La Paz and DDU Ndjamena.
DDP ( the named point of destination)Delivered Duty Paid
The seller is responsible for most of the expenses, which include the cargo insurance, import customs clearance, and payment of customs duties and taxes at the buyer's end, and the delivery of goods to the final point at destination, which is often the project site or buyer's premises. The seller may opt not to insure the goods at his/her own risks.
In the export quotation, indicate the point of destination (discharge) after the acronym DDP, for example DDP Bujumbura and DDP Mbabane.
Export Contract
There are certain peculiar characteristics of international trade contracts which are not present in those for sale of goods in domestic market. The parties to all international trade contracts provide all their relative rights and obligations in several ways.
As far as export by Indians is concerned, all sale transactions whether in the domestic market or abroad are covered by the Sales of Goods Act. 1930 in the absence of any provisions to the contrary agreed to by the buyer and the seller.
The Indian” Sale of Goods Act, 1930” is generally based on common law system and, therefore, it bears a close resemblance to the relevant enactments on the subjects in U.K., the U.S.A. and the other Commonwealth countries which derive their laws from the common law systems”.
According to Section 5 of this Act,” A contract of sale is made by an offer to buy or sell goods for a price and the acceptance of such offer. It may provide for delivery to be made and price to be paid immediately or in future. It may be made orally or it may be implied from the conduct of the parties in each case”.
Standard Contract Forms:-
Notwithstanding the efforts are made by various national/international organizations like the United Nations Commission on international Trade Law (UNCIRAL) the Economic Commission for Europe (ECE) the Council for Mutual Economic Aid (CMEA), etc., “there is still no perfection or a device which would give the parties an accurate and complete idea of each others understanding of the various trade terms, the commercial practices and the rights and obligations vis-à-vis each other so that misunderstandings are practically eliminated. There is considerable diversity and plurality of commercial laws and practices in various parts of the world.”
General Conditions:-
On account of the fact that it is impractical to evolve a comprehensive standard contract form which is applicable to all trades and commodities, efforts should be made to put in the letter of sale/purchase which may as well be termed as export or sale/purchase contracts, certain minimum and important general requirements or standard general conditions. These conditions should give the parties a clear cut idea of trade transactions and also draw their attention to all important terms which should generally be included in international trade contracts.
Elements of Export Contracts
An export contract between the exporter and the importer should determine the exact point at which the expense and responsibilities change from seller to buyer it should be as explicit as possible and without any ambiguity regarding the exact specification of goods and terms of sale including export price mode of payment storage and distribution methods type of packaging part of shipment delivery schedule etc.
All the terms have a special connotation and meaning in international trade which must be understood by the parties particularly these days when there is by and large complete absence of sale and purchase or of transactions on the basis of as is where is . The different elements of an export contract are discussed below.
Products, standards and specifications
The first important element of an export contract is explicitly state the following
Product name including technical name if any
Sizes if any in which to be supplied.
Standards specifications national or according to specific requirements of buyer or as per the sample approved by him. Details of specification of the sample must be given in the contract.
Quantity
Put the quantity both in figures and words clearly specify whether it is in terms of number, weight or volume .if the quantity refers to goods by weight or measurement specify the nature of the same for example weight could be in terms of a metric ton of 1000 kgs. 2200 lb etc.
3. Inspection
Whereas a number of goods are now subject to pre shipment inspection by designated agencies the foreign buyer may still stipulated his own conditions and manner of inspections by any other agency.
4. Total value of the contract
The total value of the contract may also be put in both figures and words specifying the currency along with the name of the country.
5. Terms of delivery
Also known as the type of price terms of delivery should be clear incorporated in the contracted it could be a FOB, c.i.f., c & f etc.
6. Taxes duties &charges
The taxes duties and charges relating to exportation of goods are normally a part of the price terms of delivery quoted by the seller. Similarly, such levies if any in the country of importation are to the buyer. Nevertheless the contract should be explicit on this account so that no misunderstanding arises between the parties.
7. Period of delivery/ shipment etc.
As distinguished from terms of delivery period of delivery/ shipment relates to the actual date or dates of delivery/ shipment. In addition it must states the places of dispatch and delivery because if it is not designated the place of the business of he seller is usually deemed to be the place of delivery. The exact date of delivery should be essentially put in the contract as expressions like immediate delivery or prompt delivery is quite ambiguous. Moreover, it should be clarified whether the time for delivery will run from the date of the contract or from the date of receipt of the date of the contract or from the date of receipt of the notice of issuance of the import licence by the seller, etc.
Part- shipment/transshipment / Consolidation by cargo scheme.
The contract must clearly state whether part-shipment/transshipment are agreed upon by the parties. In the absence of such stipulations, a dispute generally arises when the seller (exporter) is unable to ship the goods in one lot or directly to the port of delivery (destination). If any, of the port of transshipment and the number, if any of the port shipment agreement and the goods are likely to be dispatched (shipped)under the consolidation of export-Cargoes scheme ,do make a reference to the same in the export contract. The incorporation of such a clause in the L/C opened by foreign buyer in favour of exporter will facilitate realization of export proceeds.
8. Packing, Labeling & Marking
The export contract must be as explicit as possible about the type of package and particular labels and marking requirements, if any. These requirements are normally quite different in case of export consignments and such involve additional cost necessitating an upward revision in export price. The language, colors of labels and even of marking have care of as required by the buyer.
9. Terms of Payment-Amount, Mode & Currency
The mode and manner of payment for the goods to be contracted vary from contract to contract depending upon the “term” settled between the parties. While quoting different payment terms, the exporter should specify as to whether the prices are based on current rate of exchange of the Indian rupee on the basis of another currency. It should also be stated whether fluctuations in the rate of exchange are to the account of the seller or buyer.
10. Discounts & Commissions
Depending upon the source of export enquiry and the intermediary involved, if any, in the execution of an order, the contract should be specify the amount of discount/commission to be paid and by whom. The basis of calculation of commission and the rate of the same may also be clearly stipulated. Some exporters may not prefer to include the term” commission/discount“ in their export contracts as it may encourage a buyer to ask for commission though the seller does not want to offer the same.
11. Licences and Permits
Normally, all export/import transactions involve obtaining of licences and permits/quotas to export/import in the country of exportation/importation. The problem with regard to import licences in the buyer’s country is sometimes more prominent and acute in different developing countries. The parties should, therefore, clearly state as to whether the export/import licences and whose responsibility and expense it would be obtain the same.
12. Insurance
It is important in international trade contracts to provide for insurance of goods against loss, damage or destruction during the voyage as it takes a long time before they are received by the buyers. The extent of insurance risk & its incidence needs to be clearly described & proper insurance policies obtained.
13. Documentary requirement
International trade transactions usually involve certain special documents which can be broadly divided into four categories:-
(i) Document required for exportation/importation of goods.
(ii) Documents needed by the buyer for taking delivery of goods.
(iii) Document relating to the payment.
(iv) Special documents depending upon the nature of goods & the conditions of sale. For ex. certain engineering goods may involve documents relating to erection, repair, maintained.
Documents commonly asked for & relating to the four diff. aspects stated above include:-
(i) Bill of exchange
(ii) Commercial invoice
(iii) Bill of lading
(iv) Insurance policy
(v) Letter of credit
(vi) Technical documents
Then, there may be certain conditions or cost attached to the preparation, & presentation of documents which need to be stated clearly the party who would bear the same.
14. Guarantee
The element of “guarantee” is usually dependent upon the “nature of goods their quality, the use for which they are intended & the like” The guarantee usually extend in respect of “faulty design, material or work-man ship & to such other characteristics as may be agreed upon between the parties”. Hence it is not a general element of contract as “guarantee” is applicable to specified goods only,
15. Force Majeure or For Non-Performance of Contract
However faithfully one may attempt to fulfill the conditions of contract, certain supervening circumstances render it impossible for a party to the contract to fulfill its obligations under the contract. Therefore, it is desirable for the parties to include in the contract certain provisions defining the circumstances which would relive them of their liability for non performance of their contract. Such provision which are also known as Force Majeure” are intended to deal with the relief which may be available to either party to the contract in the event of supervening circumstances taking place after the conclusion of the contract.
Definition of Force Majeure
The best approach in regard to the definition of “Force majeure” is to list the important event and circumstances which are agreed upon between the parties as specific grounds for relief and further add general wards to cover up anything that may have been omitted, e.g. or any other cause beyond the control of the concerned party which could not have been foreseen or avoided by the exercise of due diligence and so it be impossible of performance.
16. Remedies
It is always better to include in sale /purchase contract certain specific remedies in respect of deferent default of contractual obligation by any of the parties, mandatory should be in consonance with the mandatory provision of the applicable law to the contract. The Indian Council of Arbitration has suggested various clauses providing for possible remedies against contract. Exporters may, therefore, approach the ICA for obtaining its expert advice.
17. Arbitration
Last but not least id the need for providing an arbitration clause for amicable and quick settlement of disputes or difference that may arise between the parties. The various arbitration clauses and other aspect are dealt with in a separate chapter on Trade Disputes.
Model Contract Form
There is no particular form prescribed for the drawing up of trade contracts, except that they must fulfill all the essential requirements of a valid contract under the law applicable thereto.
Despite the difficulties in preparing a model contract from applicable to all trades, an attempt is made here to give a specimen export contract. It provides for various elements of export contracts described in fore going paragraphs & can be modified to suit the needs of exporters/importers.
Specimen Export Contract
ABC( international India) Telex:
W-13, C.P. Cable:
New Delhi-110001 Phone:
Fax:
Contract NO ……………. Date……………….
CONTRACT
We have agreed (to buy from) (or sell to) you this day....................... The following:-
Product, standards & specifications.
Quality
Inspection
Total value of the contract
Terms of delivery
Taxes, Duties & Charges
Period of Delivery/ Shipment or Transshipment
Packing, Labeling & Making
Terms of payment
Discount & commission
Licenses & permits
Insurances
Documentary requirements
Guarantee
Force Majeure
Remedies
Arbitration
For & on behalf of
ABC (International)INDIA
Director
This contract is subject to the condition overleaf or attached here with. Received from ABC (International) INDIA, NEW DELHI, Contract No............ Dated................... for which we hereby confirm.
For & on behalf of………………………
Signature……………….
Please sign & return this portion
Proforma Invoice
Along with the export contract, a Proforma invoice is also dispatched to the foreign buyer, even if not asked for him.
This is a preliminary, provisional, and temporary invoice covering a contemplated shipment. It is advisable to send this invoice to the importer along with the quotation and terms set out in the contract form. The proforma invoice is usually made out in the exporter’s own commercial invoice forms and contains estimates and is not intended to have the status of bill for payment. It is useful to buyer in the following ways.
(i) It helps the importer to obtain an import licence in cases where proforma invoice is insisted upon by the authorities concerned.
(ii) L/C may be opened in accordance with this ‘invoice’.
(iii) It may help eliminate common mistake like incorrect spelling or description of goods, etc.
Sample of Proforma Invoice
To …………..., 2009
XYZ International
P.O.Box 1867
London MK 46 ABN (England)
Proforma Invoice No. -------------------
Your reference No…………..dated………………for the supply ………………Of ………………………as per the terms and conditions set out herein and/or the export (sale) contract to be signed between us, to be dispatched by sea/air/post to……………….. (Port/place of destination).
Description of Goods
& Specifications
Code
Size
Quantity
Unit price &Currency
f.o.b./c.&f./c.i.f. etc
Amount
E.&O.F
Prepared by:-
Checked by:-
For ABC(India) International
Director (Sale)
NB. See’ Terms &Conditions’ below:↓
Terms & Conditions
Price : f.o.b. (Mum./Cal./Chen./Cochin)
& C. &f. ( )
Validity c.i.f ( )
Insurance
& freight : Only approximate charges are given in this invoice. Actuals may vary either side
Payment Terms : By irrevocableL/C confirmed by a bank in New Delhi for full Amt.
Commission : Nil or ……..%
Pre-shipment : By us or Export Inspection Agency
Inspection
Certificate of : As advised
Origin
Import : Buyer’s responsibility
Lincence
Port of Shipment : Mum./Cal./Chen./Cochin
Shipping &
Insurance co. : As available at the time of shipment
Delivery period : Goods to be delivered (loaded for shipment) with in ………… days of the receipt of firm order & its confirmation by us.
Part ship-ment : Part / partial shipment permissible / not perm
Transshipment : permissible / not perm
Net weight : Each pack of…. Kegs
Export
License or visa / : our responsibility
Quota
References
Export, What where & How (Parasram)
Web Pages:
Inco terms.mht
www.export911.com
Google.com
The INCOTERMS (International Commercial Terms) is a universally recognized set of definitions of international trade terms, such as FOB, CFR and CIF, developed by the International Chamber of Commerce (ICC) in Paris, France. It defines the trade contract responsibilities and liabilities between buyer and seller. It is invaluable and a cost-saving tool. The exporter and the importer need not undergo a lengthy negotiation about the conditions of each transaction. Once they have agreed on a commercial term like FOB, they can sell and buy at FOB without discussing who will be responsible for the freight, cargo insurance, and other costs and risks.
The INCOTERMS was first published in 1936---INCOTERMS 1936---and it is revised periodically to keep up with changes in the international trade needs. The complete definition of each term is available from the current publication---INCOTERMS 2000. The publication is available at your local Chamber of Commerce affiliated with the International Chamber of Commerce (ICC).
Many importers and exporters worldwide are accustomed to and may still use the INCOTERMS 1980, the predecessor of INCOTERMS 1990 and INCOTERMS 2000.
Under the INCOTERMS 2000, the international commercial terms are grouped into E, F, C and D, designated by the first letter of the term (acronym), as follows:
International Commercial Terms( INCOTERMS )
GROUP
TERM
Stands for
E
EXW
Ex Works
F
FCA
Free Carrier
FAS
Free Alongside Ship
FOB
Free On Board
C
CFR
Cost and Freight
CIF
Cost, Insurance and Freight
CPT
Carriage Paid To
CIP
Carriage and Insurance Paid To
D
DAF
Delivered At Frontier
DES
Delivered Ex Ship
DEQ
Delivered Ex Quay
DDU
Delivered Duty Unpaid
DDP
Delivered Duty Paid
In practice, trade terms are written with either all upper case letters (e.g. FOB, CFR, CIF, and FAS) or all lower case letters (e.g. fob, cfr, cif, and fas). They may be written with periods (e.g. F.O.B. and c.i.f.).
In international trade, it would be best for exporters to refrain, wherever possible, from dealing in trade terms that would hold the seller responsible for the import customs clearance and/or payment of import customs duties and taxes and/or other costs and risks at the buyer's end, for example the trade terms DEQ (Delivered Ex Quay) and DDP (Delivered Duty Paid). Quite often, the charges and expenses at the buyer's end may cost more to the seller than anticipated. To overcome losses, hire a reliable customs broker or freight forwarder in the importing country to handle the import routines.
Similarly, it would be best for importers not to deal in EXW (Ex Works), which would hold the buyer responsible for the export customs clearance, payment of export customs charges and taxes, and other costs and risks at the seller's end.
EXW ( the named place)Ex Works
Ex means from. Works means factory, mill or warehouse, which is the seller's premises. EXW applies to goods available only at the seller's premises. Buyer is responsible for loading the goods on truck or container at the seller's premises, and for the subsequent costs and risks.
In practice, it is not uncommon that the seller loads the goods on truck or container at the seller's premises without charging loading fee.
In the quotation, indicate the named place (seller's premises) after the acronym EXW, for example EXW Kobe and EXW San Antonio.
The term EXW is commonly used between the manufacturer (seller) and export-trader (buyer), and the export-trader resells on other trade terms to the foreign buyers. Some manufacturers may use the term Ex Factory, which means the same as Ex Works.
FCA ( the named point of departure)Free Carrier
The delivery of goods on truck, rail car or container at the specified point (depot) of departure, which is usually the seller's premises, or a named railroad station or a named cargo terminal or into the custody of the carrier, at seller's expense. The point (depot) at origin may or may not be a customs clearance center. Buyer is responsible for the main carriage/freight, cargo insurance and other costs and risks.
In the air shipment, technically speaking, goods placed in the custody of an air carrier are considered as delivery on board the plane. In practice, many importers and exporters still use the term FOB in the air shipment.
The term FCA is also used in the RO/RO (roll on/roll off) services.
In the export quotation, indicate the point of departure (loading) after the acronym FCA, for example FCA Hong Kong and FCA Seattle.
Some manufacturers may use the former terms FOT (Free On Truck) and FOR (Free On Rail) in selling to export-traders.
FAS ( the named port of origin)Free Alongside Ship
Goods are placed in the dock shed or at the side of the ship, on the dock or lighter, within reach of its loading equipment so that they can be loaded aboard the ship, at seller's expense. Buyer is responsible for the loading fee, main carriage/freight, cargo insurance, and other costs and risks.
In the export quotation, indicate the port of origin (loading) after the acronym FAS, for example FAS New York and FAS Bremen.
The FAS term is popular in the break-bulk shipments and with the importing countries using their own vessels.
FOB ( the named port of origin)Free On Board It constitute the following:-
Ex-work price
packing charges
inland transportation cost
Wharfage porterage
Customs dues
Export duty, if any.
Cost of checking operations like checking of quality, measure, weight or quantity, if any.
FOB price actually comprises FOB port town plus charges incidental to actual shipment of goods but minus ocean fright and marine insurance charges. This quotation is very common in case where goods are exported through Export House and merchant exporters as also to such overseas customers in whose country import duty is charged on FOB Value at the port of shipment.
FOB transactions are carried out on a “mixed contract” basis, which implies that ‘exporter would base his quotation and costing on FOB basis but in addition act on behalf of his customer in arranging shipment, procuring the bill of lading and also arranging insurance.
The term i.e. FOB (named port of shipment) can only be used for sea or inland waterway transport . When the ship’s rail serves no practical purpose, such as in the case of “roll-off or container traffic, the FCA term is more appropriate.
CFR ( the named port of destination)Cost and Freight
CFR means the seller (exporter) must pay the cost and fright necessary to bring the goods to the named port of destination (and not departure or loading) but the risk of loss or dames to the goods, as well as any additional costs due to events occurring after the time the goods have been delivered on board the vessel, is transferred from the seller to the buyer when the goods pass the ships rail in the port of shipment. It requires the seller to clear the goods for export.
This term can also be used for sea and inland waterway transport. When the ship’s rail serves no off or container traffic, the CPT term in more appropriate to use.
It is equivalent to the term “C&F” used normally
CIF ( the named port of destination)Cost, Insurance and Freight
It is most commonly used in export transactions, includes FOB price plus cost of ocean freight and marine insurance, up to the port of destination. In CIF quotation, care must be taken to state the name of the port to which the goods are intended to be shipped .However, if the “CIF price is applicable all over the world, the quotation should be “CIF Main Port”.
CIF does not, however, include any charges for unloading the goods or for import duties, if any, in the country of importation .It is the preferred type of quotation because the importer can know what exactly the goods will cost him at his port. Moreover, it means fewer responsibilities for him because it is the export who takes all risks for fluctuations in ‘rates of insurance and freight, unless otherwise specified in the export contract’.
Thus, it is CFR plus marine insurance against the buyer’s risk of or damage to the goods during the carriage. The seller contracts for insurance and pays the insurance premium. It can only be used for sea and inland waterway transport. When the ship’s rail serves no practical purposes such as in the case of roll-on /roll-off or container traffic, the CIP term is more appropriate to use.
CIF³ & c
Cost, Insurance and Freight & commission
In this type of quotation, besides cost, insurance and freight, commission charged by a middleman, if any, is included in the price. It may also include the commission of the exporter which he may charge the buyer (importer) while acting on his behalf.
The small letter ‘c’ must, therefore, be explained clearly in the export quotation/contract as it may sometimes relate to the commission of the import agent.
CIF &C³ or FOB & C³
These are quoted where the exporter assumes the risk of exchange fluctuations that may occur between the date of contract acceptance and payment.
CIF & c & I³
The word’c’ & ‘I’ in this quotation stands for commission & interest and, hence, it makes clear to the buyer that bank’s interest and commission are payable by him. This type of quotation is used when export is affected to distant places in which case the settlement of the bill of exchange drawn on the importer takes some time.
CIF ex³
It includes cost, insurance, freight and exchange. The expression ‘exchange’ is, however, ambiguous in this type of quotation. Sometimes, it refers to the banker’s commission or charge and sometimes to exchange fluctuations. When it refers to exchange fluctuation , it means that the purchase price is not affected by the subsequent rise or fall of the agreed currency of payment between the exporter and the importer.
CPT ( the named place of destination)Carriage Paid To
The delivery of goods to the named place of destination (discharge) at seller's expense. Buyer assumes the cargo insurance, import customs clearance, payment of customs duties and taxes, and other costs and risks.
In the export quotation, indicate the place of destination (discharge) after the acronym CPT, for example CPT Los Angeles and CPT Osaka.
CIP (the named place of destination)Carriage and Insurance Paid To
The delivery of goods and the cargo insurance to the named place of destination (discharge) at seller's expense. Buyer assumes the import customs clearance, payment of customs duties and taxes, and other costs and risks.
In the export quotation, indicate the place of destination (discharge) after the acronym CIP, for example CIP Paris and CIP Athens.
DAF ( the named point at frontier)Delivered At Frontier
The delivery of goods to the specified point at the frontier at seller's expense. Buyer is responsible for the import customs clearance, payment of customs duties and taxes, and other costs and risks.
In the export quotation, indicate the point at frontier (discharge) after the acronym DAF, for example DAF Buffalo and DAF Welland.
DES ( the named port of destination)Delivered Ex Ship
The delivery of goods on board the vessel at the named port of destination (discharge), at seller's expense. Buyer assumes the unloading fee, import customs clearance, payment of customs duties and taxes, cargo insurance, and other costs and risks.
In the export quotation, indicate the port of destination (discharge) after the acronym DES, for example DES Helsinki and DES Stockholm.
DEQ ( the named port of destination)Delivered Ex Quay
The delivery of goods to the quay (the port) at destination at seller's expense. Seller is responsible for the import customs clearance and payment of customs duties and taxes at the buyer's end. Buyer assumes the cargo insurance and other costs and risks.
In the export quotation, indicate the port of destination (discharge) after the acronym DEQ, for example DEQ Libreville and DEQ Maputo.
DDU (the named point of destination)Delivered Duty Unpaid
The delivery of goods and the cargo insurance to the final point at destination, which is often the project site or buyer's premises, at seller's expense. Buyer assumes the import customs clearance and payment of customs duties and taxes. The seller may opt not to insure the goods at his/her own risks.
In the export quotation, indicate the point of destination (discharge) after the acronym DDU, for example DDU La Paz and DDU Ndjamena.
DDP ( the named point of destination)Delivered Duty Paid
The seller is responsible for most of the expenses, which include the cargo insurance, import customs clearance, and payment of customs duties and taxes at the buyer's end, and the delivery of goods to the final point at destination, which is often the project site or buyer's premises. The seller may opt not to insure the goods at his/her own risks.
In the export quotation, indicate the point of destination (discharge) after the acronym DDP, for example DDP Bujumbura and DDP Mbabane.
Export Contract
There are certain peculiar characteristics of international trade contracts which are not present in those for sale of goods in domestic market. The parties to all international trade contracts provide all their relative rights and obligations in several ways.
As far as export by Indians is concerned, all sale transactions whether in the domestic market or abroad are covered by the Sales of Goods Act. 1930 in the absence of any provisions to the contrary agreed to by the buyer and the seller.
The Indian” Sale of Goods Act, 1930” is generally based on common law system and, therefore, it bears a close resemblance to the relevant enactments on the subjects in U.K., the U.S.A. and the other Commonwealth countries which derive their laws from the common law systems”.
According to Section 5 of this Act,” A contract of sale is made by an offer to buy or sell goods for a price and the acceptance of such offer. It may provide for delivery to be made and price to be paid immediately or in future. It may be made orally or it may be implied from the conduct of the parties in each case”.
Standard Contract Forms:-
Notwithstanding the efforts are made by various national/international organizations like the United Nations Commission on international Trade Law (UNCIRAL) the Economic Commission for Europe (ECE) the Council for Mutual Economic Aid (CMEA), etc., “there is still no perfection or a device which would give the parties an accurate and complete idea of each others understanding of the various trade terms, the commercial practices and the rights and obligations vis-à-vis each other so that misunderstandings are practically eliminated. There is considerable diversity and plurality of commercial laws and practices in various parts of the world.”
General Conditions:-
On account of the fact that it is impractical to evolve a comprehensive standard contract form which is applicable to all trades and commodities, efforts should be made to put in the letter of sale/purchase which may as well be termed as export or sale/purchase contracts, certain minimum and important general requirements or standard general conditions. These conditions should give the parties a clear cut idea of trade transactions and also draw their attention to all important terms which should generally be included in international trade contracts.
Elements of Export Contracts
An export contract between the exporter and the importer should determine the exact point at which the expense and responsibilities change from seller to buyer it should be as explicit as possible and without any ambiguity regarding the exact specification of goods and terms of sale including export price mode of payment storage and distribution methods type of packaging part of shipment delivery schedule etc.
All the terms have a special connotation and meaning in international trade which must be understood by the parties particularly these days when there is by and large complete absence of sale and purchase or of transactions on the basis of as is where is . The different elements of an export contract are discussed below.
Products, standards and specifications
The first important element of an export contract is explicitly state the following
Product name including technical name if any
Sizes if any in which to be supplied.
Standards specifications national or according to specific requirements of buyer or as per the sample approved by him. Details of specification of the sample must be given in the contract.
Quantity
Put the quantity both in figures and words clearly specify whether it is in terms of number, weight or volume .if the quantity refers to goods by weight or measurement specify the nature of the same for example weight could be in terms of a metric ton of 1000 kgs. 2200 lb etc.
3. Inspection
Whereas a number of goods are now subject to pre shipment inspection by designated agencies the foreign buyer may still stipulated his own conditions and manner of inspections by any other agency.
4. Total value of the contract
The total value of the contract may also be put in both figures and words specifying the currency along with the name of the country.
5. Terms of delivery
Also known as the type of price terms of delivery should be clear incorporated in the contracted it could be a FOB, c.i.f., c & f etc.
6. Taxes duties &charges
The taxes duties and charges relating to exportation of goods are normally a part of the price terms of delivery quoted by the seller. Similarly, such levies if any in the country of importation are to the buyer. Nevertheless the contract should be explicit on this account so that no misunderstanding arises between the parties.
7. Period of delivery/ shipment etc.
As distinguished from terms of delivery period of delivery/ shipment relates to the actual date or dates of delivery/ shipment. In addition it must states the places of dispatch and delivery because if it is not designated the place of the business of he seller is usually deemed to be the place of delivery. The exact date of delivery should be essentially put in the contract as expressions like immediate delivery or prompt delivery is quite ambiguous. Moreover, it should be clarified whether the time for delivery will run from the date of the contract or from the date of receipt of the date of the contract or from the date of receipt of the notice of issuance of the import licence by the seller, etc.
Part- shipment/transshipment / Consolidation by cargo scheme.
The contract must clearly state whether part-shipment/transshipment are agreed upon by the parties. In the absence of such stipulations, a dispute generally arises when the seller (exporter) is unable to ship the goods in one lot or directly to the port of delivery (destination). If any, of the port of transshipment and the number, if any of the port shipment agreement and the goods are likely to be dispatched (shipped)under the consolidation of export-Cargoes scheme ,do make a reference to the same in the export contract. The incorporation of such a clause in the L/C opened by foreign buyer in favour of exporter will facilitate realization of export proceeds.
8. Packing, Labeling & Marking
The export contract must be as explicit as possible about the type of package and particular labels and marking requirements, if any. These requirements are normally quite different in case of export consignments and such involve additional cost necessitating an upward revision in export price. The language, colors of labels and even of marking have care of as required by the buyer.
9. Terms of Payment-Amount, Mode & Currency
The mode and manner of payment for the goods to be contracted vary from contract to contract depending upon the “term” settled between the parties. While quoting different payment terms, the exporter should specify as to whether the prices are based on current rate of exchange of the Indian rupee on the basis of another currency. It should also be stated whether fluctuations in the rate of exchange are to the account of the seller or buyer.
10. Discounts & Commissions
Depending upon the source of export enquiry and the intermediary involved, if any, in the execution of an order, the contract should be specify the amount of discount/commission to be paid and by whom. The basis of calculation of commission and the rate of the same may also be clearly stipulated. Some exporters may not prefer to include the term” commission/discount“ in their export contracts as it may encourage a buyer to ask for commission though the seller does not want to offer the same.
11. Licences and Permits
Normally, all export/import transactions involve obtaining of licences and permits/quotas to export/import in the country of exportation/importation. The problem with regard to import licences in the buyer’s country is sometimes more prominent and acute in different developing countries. The parties should, therefore, clearly state as to whether the export/import licences and whose responsibility and expense it would be obtain the same.
12. Insurance
It is important in international trade contracts to provide for insurance of goods against loss, damage or destruction during the voyage as it takes a long time before they are received by the buyers. The extent of insurance risk & its incidence needs to be clearly described & proper insurance policies obtained.
13. Documentary requirement
International trade transactions usually involve certain special documents which can be broadly divided into four categories:-
(i) Document required for exportation/importation of goods.
(ii) Documents needed by the buyer for taking delivery of goods.
(iii) Document relating to the payment.
(iv) Special documents depending upon the nature of goods & the conditions of sale. For ex. certain engineering goods may involve documents relating to erection, repair, maintained.
Documents commonly asked for & relating to the four diff. aspects stated above include:-
(i) Bill of exchange
(ii) Commercial invoice
(iii) Bill of lading
(iv) Insurance policy
(v) Letter of credit
(vi) Technical documents
Then, there may be certain conditions or cost attached to the preparation, & presentation of documents which need to be stated clearly the party who would bear the same.
14. Guarantee
The element of “guarantee” is usually dependent upon the “nature of goods their quality, the use for which they are intended & the like” The guarantee usually extend in respect of “faulty design, material or work-man ship & to such other characteristics as may be agreed upon between the parties”. Hence it is not a general element of contract as “guarantee” is applicable to specified goods only,
15. Force Majeure or For Non-Performance of Contract
However faithfully one may attempt to fulfill the conditions of contract, certain supervening circumstances render it impossible for a party to the contract to fulfill its obligations under the contract. Therefore, it is desirable for the parties to include in the contract certain provisions defining the circumstances which would relive them of their liability for non performance of their contract. Such provision which are also known as Force Majeure” are intended to deal with the relief which may be available to either party to the contract in the event of supervening circumstances taking place after the conclusion of the contract.
Definition of Force Majeure
The best approach in regard to the definition of “Force majeure” is to list the important event and circumstances which are agreed upon between the parties as specific grounds for relief and further add general wards to cover up anything that may have been omitted, e.g. or any other cause beyond the control of the concerned party which could not have been foreseen or avoided by the exercise of due diligence and so it be impossible of performance.
16. Remedies
It is always better to include in sale /purchase contract certain specific remedies in respect of deferent default of contractual obligation by any of the parties, mandatory should be in consonance with the mandatory provision of the applicable law to the contract. The Indian Council of Arbitration has suggested various clauses providing for possible remedies against contract. Exporters may, therefore, approach the ICA for obtaining its expert advice.
17. Arbitration
Last but not least id the need for providing an arbitration clause for amicable and quick settlement of disputes or difference that may arise between the parties. The various arbitration clauses and other aspect are dealt with in a separate chapter on Trade Disputes.
Model Contract Form
There is no particular form prescribed for the drawing up of trade contracts, except that they must fulfill all the essential requirements of a valid contract under the law applicable thereto.
Despite the difficulties in preparing a model contract from applicable to all trades, an attempt is made here to give a specimen export contract. It provides for various elements of export contracts described in fore going paragraphs & can be modified to suit the needs of exporters/importers.
Specimen Export Contract
ABC( international India) Telex:
W-13, C.P. Cable:
New Delhi-110001 Phone:
Fax:
Contract NO ……………. Date……………….
CONTRACT
We have agreed (to buy from) (or sell to) you this day....................... The following:-
Product, standards & specifications.
Quality
Inspection
Total value of the contract
Terms of delivery
Taxes, Duties & Charges
Period of Delivery/ Shipment or Transshipment
Packing, Labeling & Making
Terms of payment
Discount & commission
Licenses & permits
Insurances
Documentary requirements
Guarantee
Force Majeure
Remedies
Arbitration
For & on behalf of
ABC (International)INDIA
Director
This contract is subject to the condition overleaf or attached here with. Received from ABC (International) INDIA, NEW DELHI, Contract No............ Dated................... for which we hereby confirm.
For & on behalf of………………………
Signature……………….
Please sign & return this portion
Proforma Invoice
Along with the export contract, a Proforma invoice is also dispatched to the foreign buyer, even if not asked for him.
This is a preliminary, provisional, and temporary invoice covering a contemplated shipment. It is advisable to send this invoice to the importer along with the quotation and terms set out in the contract form. The proforma invoice is usually made out in the exporter’s own commercial invoice forms and contains estimates and is not intended to have the status of bill for payment. It is useful to buyer in the following ways.
(i) It helps the importer to obtain an import licence in cases where proforma invoice is insisted upon by the authorities concerned.
(ii) L/C may be opened in accordance with this ‘invoice’.
(iii) It may help eliminate common mistake like incorrect spelling or description of goods, etc.
Sample of Proforma Invoice
To …………..., 2009
XYZ International
P.O.Box 1867
London MK 46 ABN (England)
Proforma Invoice No. -------------------
Your reference No…………..dated………………for the supply ………………Of ………………………as per the terms and conditions set out herein and/or the export (sale) contract to be signed between us, to be dispatched by sea/air/post to……………….. (Port/place of destination).
Description of Goods
& Specifications
Code
Size
Quantity
Unit price &Currency
f.o.b./c.&f./c.i.f. etc
Amount
E.&O.F
Prepared by:-
Checked by:-
For ABC(India) International
Director (Sale)
NB. See’ Terms &Conditions’ below:↓
Terms & Conditions
Price : f.o.b. (Mum./Cal./Chen./Cochin)
& C. &f. ( )
Validity c.i.f ( )
Insurance
& freight : Only approximate charges are given in this invoice. Actuals may vary either side
Payment Terms : By irrevocableL/C confirmed by a bank in New Delhi for full Amt.
Commission : Nil or ……..%
Pre-shipment : By us or Export Inspection Agency
Inspection
Certificate of : As advised
Origin
Import : Buyer’s responsibility
Lincence
Port of Shipment : Mum./Cal./Chen./Cochin
Shipping &
Insurance co. : As available at the time of shipment
Delivery period : Goods to be delivered (loaded for shipment) with in ………… days of the receipt of firm order & its confirmation by us.
Part ship-ment : Part / partial shipment permissible / not perm
Transshipment : permissible / not perm
Net weight : Each pack of…. Kegs
Export
License or visa / : our responsibility
Quota
References
Export, What where & How (Parasram)
Web Pages:
Inco terms.mht
www.export911.com
Google.com
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