By: Starkeisha
Tucker, Intern, International Judicial Academy
International transactions
make up some of the daily activities of public and private businesses. With the
recent economic changes there has been a deficit in the number of transactions
between the United States and the rest of the world. This article discusses the
essential part of Incoterms in the language of trade and how the terms are
intertwined with international sales transactions.
According to the U.S. Department of Commerce, good imports decreased by $26.4 billion
in the first quarter of 2015. Could the developing movement for local
transactions effectuate this change; are consumers and businesses developing
creative ways to acquire goods and services in-house? This is an interesting
question, although there may be a developing movement for more local
transactions, international sales transactions are still an important component
of many businesses.
International
commercial terms or Incoterms set the tone for risk, costs, and obligations for
parties in bi-coastal sales transactions. The ICC published the eighth revision
in January 2011. The revisions have streamlined the
commonly used terms to mirror ever-growing shipping standards. New revisions
allow parties to substitute paper communications with electronic equivalents.
Transactions between the buyer and seller are more efficient and communication
is smoother.
With any
international transaction it is necessary to assign the foreseeable risk
clearly to all parties involved. This includes the contracting parties,
vendors, partners, distributors, and the banks. It is necessary to assign the
appropriate terms in the sales contract and the appropriate payment terms in
the letter of credit. The sales contract includes necessary details such as the
good, quantity, cost, delivery, and governing law.
There are eleven
most commonly used “incoterms,” separated into two broad categories of transportation,
according to the International Chamber of Commerce. The Incoterms are explained
in the order of increasing responsibility on the seller for any mode of
transportation followed by the rules for sea and inland waterway transport. The
terms selected depends on the nature of the good and the agreement between the
parties. With either term the buyer is responsible for adhering to
international packaging regulations when preparing goods for transit. Now most
exporters aim to use environmentally friendly packaging.
Ex-Works (EXW)
The seller has the
least amount of responsibility under this term. The seller as agreed by
contract has the goods available for the buyer to retrieve at a previously
agreed place or at the seller’s location. At the point of pick up the risk and
cost passes to the buyer. The buyer will load, transport and clear customs for
export. The seller is only responsible for export packaging, marking, and
labeling the goods for transport. The packaging regulations implement
Free Carrier (FCA)
Seller retains the
same responsibilities as EXW but the responsibility extends to the export
clearance. Export clearance means the buyer’s liability does not begin until
the goods are cleared to enter the buyer’s country. The buyer will be
responsible for resolving issues with clearance documents or product damage.
Carriage Paid To
(CPT)
The buyer covers
title, risk, and insurance cost when the goods are delivered to the carrier by
the seller, and the buyer. The seller will choose the freight forwarder, cover
document fees, cover loading, freight (air or ocean), and choose an export
forwarder. This term assigns much responsibility to the seller—the seller is
liable for safe transit until the goods arrive to the agreed destination.
With CPT and the
terms above, the Incoterms does obligate the buyer or seller to insure
the goods during transport. The parties may address this issue in the sales
contract.
Carriage Insurance
Paid To (CIP)
The seller assumes
responsibility for insuring the goods for transport, unlike other terms where
either party can handle the cost of insurance. Seller covers this cost along
with the additional responsibilities under CPT.
Delivered at
Terminal (DAT)
The seller becomes
more generous as we move through the terms. Here, the goods are covered from
the seller’s location until the goods are unloaded at the main carriers
location, with the exception of insurance cost. When the goods are unloaded the
risk and cost pass to the buyer unless otherwise agreed in the sales contract.
The buyer expressly covers the broker clearance fees, duty, custom fees,
delivery to his destination, and unloading at his destination.
Delivered at Place
(DAP)
This term explains
the seller is liable for all cost and expenses except insurance to the buyer’s
destination terminal. Once the product reaches the agreed location, not the
final destination, risk passes to the seller.