International Legal Affairs: Volume 4, Number 3
When buying consumer items online, particularly within the United States, the cost of shipping the item is frequently borne by the buying consumer. Sometimes, the seller will agree to pay shipping. Insurance against theft or loss may (or may not) be included. When conducting international transactions, who pays for shipping? Who bears the risk of loss? Is insurance included in the shipping costs? If not, who pays for insurance on the cargo, and what does it cover? Luckily, international trade has been conducted for thousands of years, and specific terms describing the rights and responsibilities of the buyer and seller have been created. Known as “Inco Terms,” the odd combination of letters describes the various means of shipping goods internationally.
Incoterms, or more formally, International Commercial Terms, are pre-defined commercial terms created and maintained by the International Chamber of Commerce. Incoterms are widely used in international commercial transactions to describe common sales terms, but may also be used to describe domestic commercial transactions. Incoterms are primarily intended to clearly communicate the tasks, costs and risks associated with the transportation and delivery of goods between buyers and sellers and are intended to reduce or eliminate uncertainties arising from varying expectations between cultures. First published in 1936, the Incoterms rules have been periodically updated to reflect current trends in international trade.
There are currently eleven Inco terms to describe the shipping and insurance terms in a transaction. Most recently modified in 2010, the eleven terms are:
Rules for Any Mode of Transport:
- EXW: Ex Works
- FCA: Free Carrier (Delivered to Carrier)
- CPT: Carriage Paid To (Named Place)
- CIP: Carriage and Insurance Paid to (Named Place)
- DAT: Delivered at Terminal (Named place, unloaded at terminal)
- DAP: Delivered at Place (Named place, not unloaded at terminal)
- DDP: Delivered Duty Paid
Rules for Ocean Shipments
- FAS: Free Alongside Ship (Delivered to carrier)
- FOB: Free On Board (Delivered on- board)
- CFR: Cost and Freight (Delivered to carrier)
- CIF: Cost, Insurance and Freight (Delivered on board)
The first seven rules are applicable to any mode of transportation, typically air or ocean cargo. The last four terms are applicable only to ocean shipments. Using the last four terms to describe an air cargo shipment would be improper. If a buyer is responsible for paying the cost of the goods, the insurance for the shipment, and the freight costs, but the cargo is being shipped via air cargo, the proper Incoterm would be CIP, rather than CIF, as CIF is appropriate only to ocean shipping.
Note that several terms – CPT, CIP, DAT, and DDP, require a named place. It makes it impossible to determine where the liability between buyer and seller intersects if the buyer and seller do not identify the delivery point. When spelled out, it makes sense – CIP, or “Carriage and Insurance Paid to” makes no sense if the destination is not identified. Similarly, there are a multitude of shipping terminals; when shipping under DAT terms, the seller frequently identifies the terminal to which the shipment must be delivered. DAT-Amsterdam would require a seller in Portland, Oregon to pay for the shipping costs from Portland to Amsterdam, in the Netherlands. Once arriving at Customs in Amsterdam, the shipping costs from Amsterdam to the buyer’s final location are borne by the buyer. These two examples are but a small fraction of the available Incoterms available for a buyer or seller to negotiate. A complete list of the 2010 Incoterms is listed in the accompanying chart.
By far, the most common Inco term is probably Ex-Works, where the buyer is responsible for all shipping and insurance charges from the point of sale. Ex-Works relieves the seller of most liability for loss or damage during shipment. Similarly, DDP – or Delivered Duty Paid, indicates that the seller is responsible for delivering the goods to the international buyer with all foreign customs fees and duties paid. The risk of loss does not transfer to the buyer until the products are delivered to the buyer.
Knowing how the goods are to be delivered is fine, but what about the risk of loss? Who pays for insurance? Luckily, the Incoterms also describe when title to the goods (and thus, the risk of loss or damage) transfers between the buyer and seller. In most cases, the risk of loss or damage transfers at the intersection between the buyer and seller within the attached chart. There are two exceptions to this rule – CIF and CIP. In both of these cases, the seller is responsible for insuring the cargo until delivery to the buyer.
In many transactions, the terms for delivery can be as important – or even more important – than the terms of sale. Being able to effectively negotiate and manage costs of delivery may make or break a transaction. In the event of loss or damage, knowing who is responsible for the loss – whether the buyer or seller – will be critical to determining who will pay for the replacement. This is but a brief exploration of Incoterms, and further study will be required to make sure that the proper terms are used to describe the duties and responsibilities of the parties. Additional information on Incoterms can be found online at the International Chamber of Commerce website, www.iccwbo.org.
Mr. Wong is a Washington licensed attorney. He regularly provides legal counsel to the firearm and defense industry via his law firm, The Firearms Law Group. Mr. Wong also maintains Hurricane Butterfly, an import/export company that assists U.S. firearm manufacturers and foreign buyers that do not wish to wade into the regulatory morass of U.S. import/export regulation. He may be contacted via email at jmwong@FirearmsLawGroup.com.
The guidance provided within this article was correct and current at the time it was written. Policies and regulations change frequently. The preceding article is not intended as legal advice, and should not be taken as legal advice. If the reader has specific legal questions, seek competent legal counsel.