Incoterms 2010 – Group C Terms – are they useful?

The C Group has the main heading of ‘Main Carriage Paid’, meaning that the main   carriage is paid by the seller. It is a constant within the Incoterms ® rule system that a place must be named when the term is formalised within the contract of supply between buyer and seller. The place named within the C term will always be a place in the country of destination, hence CIF Bangkok, CPT Sydney and so on. This is because the seller has the responsibility for paying the carriage to the point named. As we will see under ‘key points and responsibilities’ there are common confusions and misconceptions related particularly to the C group of terms which prompted the quote from Professor Ramberg referred to at the beginning of this article. Common pitfalls There are 2 groups of C terms . One is intended for use only when the goods are carried by sea (CFR and CIF). The other group (CPT and CIP) can be used for any mode of transport, including sea and multimodal transport. The sea freight terms have the ships rail as a critical point whereas the multimodal terms have delivery attached to putting the goods into the first carrier’s hands. A common pitfall is in not understanding the significant difference between the 2 groups. Without doubt, however, the C group causes considerable confusion in that unlike the other groups E, F,and D there are two critical points instead of one contained within the term. Risk passes from seller to the buyer in the country of departure but freight is paid and arranged by the seller to a point named in the country of destination. The fact that only one place is named in expressing the term, sellers and buyers fall into the trap of regarding that as the only significant point. As if these traps were not enough there is an additional pitfall in connection with insurance, two of the four C terms (CIF CIP) require the seller to take out insurance in the name of the buyer even though risk passes from seller to buyer in the country of departure. Key points and responsibilities under C group terms 1. The seller must contract for carriage to the destination specified in the term agreed in the contract of supply. This applies in each of the 4 group C terms. It is important, however, for the seller to note that two of the terms are intended for sea freight shipment only, these are CIF and CFR. With the sea freight terms the ship’s rail plays a key part as the point at which risk passes from seller to buyer. Real life example: Company H in the UK concluded an order for a New Zealand customer with the Incoterms ® rule CIF Auckland included in the written contract document. When despatch was achieved the goods were sent air freight. Because no ship’s rail was crossed risk effectively did not transfer to the buyer. No damage occurred in transit but the buyer hastened to point out to the seller a lack of compliance in the procedure which could have led to dispute. 2 .  Risk passes from seller to buyer in the country of departure either when the goods are in the hands of the first carrier (CPT and CIP) or have crossed the ships rail (CIF CFR) . Effectively the seller has no risk after these points BUT in two of the terms CIF and CIP the seller has the obligation under the term to take out insurance cover in the name of the buyer, this cover is set out in the Incoterms ® rules published by the ICC, it limits the sellers obligation to taking out minimum cover of the Institute of London Underwriters Cargo Clauses or similar. Further cover must be negotiated by the buyer and seller to cover risks additional  to the minimum referred to. Jan Ramberg has the opinion that this minimum cover comes about because of the sale of goods in transit (as in commodity trading) how, though, he asks, is the seller to know at the outset what the insurance requirements of the buyer are?  He cannot.  Therefore if the buyer requires additional cover it should make it known at the outset. Real life example:  UK buyer agreed the term CIF Felixstowe (Incoterms ® 2010) but realised that they had not understood the extent (or lack of) of insurance cover until the goods arrived from Russia in a damaged state due to ‘civil commotion’ which was not covered by the buyers insurance requirement. It then came to light that the buyer had an insurance policy for goods in transit which covered the cost, the question they were then forced to ask themselves  was “why are buying under CIF when we already are covering the risk with our own insurance ?’ Real Life example:  UK seller quoted CFR and CIF on various export quotations but did not always adhere to the requirement to ship by sea freight, this meant that they were not always able to provide a bill of lading to the buyer. The buyer in one case was not impressed by the sellers’ lack of competence or understanding which turned out to be detrimental to the relationship. Essential differences between the 4 C terms The broad characteristics of each of the 4 groups contained within the new  (2010) set of Incoterms ® rules apply to the terms contained within the particular group, e.g. under the C group terms the main carriage costs must be paid by the seller and risk will pass in the country of departure these are constants. The differences in the 4 terms are significant. Two apply to sea freight and two are multimodal. Two have obligations on the seller to insure the goods. One by one we look at the differences. CFR (Cost & Freight) Main responsibilities of the seller are: •     to contract for carriage •     to deliver the goods on board the vessel with the main carriage paid to the named point in the country of destination •     provide a clean transport document (bill of lading or sea waybill) •     arrange export clearance •     pay unloading costs if for their account under the contract of carriage Remember that, as with FOB, the ship’s rail is no longer the point at which risk passes from seller to buyer as under the 2010 set this has changed to loaded at port of export but this still means that only conventional sea freight should be used under this term. CIF (Cost, Insurance and Freight ) Main responsibilities of the seller are: •     To contract for carriage and insurance (as defined by the ICC rules) •     Deliver the goods on board •     Provide a clean transport document and a cargo insurance policy or certificate •     arrange export clearance •     pay unloading costs if required under the contract of carriage The safe loading on the ship is the key point where risk passes so conventional sea freight is the required mode of transport. CPT (Carriage paid to … named place of destination) Main responsibilities of the seller are: •     To contract for carriage •     Deliver the goods to the (first) carrier •     Provide a usual and ‘clean’ transport document •     Arrange export clearance •     Pay loading costs •     Pay unloading costs if required under the contract of carriage This term applies to any mode of transport. Risk passes when the goods are in the hands of the first carrier CIP  (Carriage & Insurance paid to … named place of destination ) Main responsibilities of the seller are: •     To contract for Carriage & Insurance •     Deliver the goods to the (first) carrier •     Provide a clean and usual transport document and certificate of insurance (or policy) •     Arrange export clearance •     Pay loading costs •     Pay unloading costs if required under the contract of carriage This term applies to any mode of transport.

Remember that the Incoterms ® rules give valuable support to buyers and sellers in establishing responsibilities in international contracts of supply but there are elements of interpretation involved which can sometimes be clarified by reference to the ICC publications referred to in this article.

Incoterms 2010 – Use FCA not FOB terms

Of the three terms contained within the F group two are intended for use only when the goods are carried by sea (but not containerised freight) or inland waterway transport, the other one FCA(Free Carrier … named place) is intended for use by any mode of transport. This differentiation between terms intended for one mode of transport rather than another leads to difficulties when parties confuse matters by using a sea freight term with an instruction to use air freight or deliver to an air freight forwarder at an airport or airport cargo centre. If the shipper air freights a consignment of goods which have been ordered as “Free on Board UK airport” then risk which should pass to the buyer when the goods cross the ships’ rail remains with the seller as there is no ships rail point for the passage of risk from one party to the other. Key points and responsibilities under F group terms. 1    Main carriage (or transportation) is the responsibility of the buyer who must nominate the carrier and be responsible for paying the freight costs from the named point in the country of departure to destination. By mutual agreement the seller can arrange the carrier and transportation but it will be at the buyers cost. Real life example :  In the early stages of supplier/customer relationship it should be made clear who is nominating the carrier and equally important identifying the place where the supplier meets his requirement for delivery under the contract of supply. All 11 Incoterms ® rules must be qualified by stating a specific place. In this example the supplier in northern England merely quoted his Japanese customer “FCA … UK”. This led to confusion as to whether the goods should have been delivered at the suppliers cost to a freight terminal or whether the buyer of the goods was required to collect from the sellers premises. Either of these options is valid under the FCA term but must be agreed at the outset. Vagueness should be avoided in order to prevent argument. 2    Risk (of loss or damage ) transfers from the seller to the buyer when the goods have been delivered to the carrier at the named point. In the 2010 set of Incoterms ® rules published by the International Chamber of Commerce (ICC) the rules relating to loading were made more logical,  ie under “Ex Works” the seller has no responsibility for loading  whereas under FCA (Sellers premises) the seller does have to load. Real life example:  Yorkshire exporter, failing to understand the loading obligation aspect of the FCA term, damaged the goods when unloading them at the nominated point which was a freight forwarders warehouse: by taking on a responsibility which was not incumbent under the term they found themselves liable for the damage incurred.   3    Cost responsibilities pass when the seller has delivered the goods to the carrier at the named place. Essential differences between the three “F” terms The broad characteristics of each of the 4 groups contained within the new 2010 set of Incoterms ® rules apply to the terms contained within it, eg under “F” group terms as described above the main carriage will be paid by the buyer, risk will pass to the buyer at the named point as will costs. This consistency within the group is vital to an understanding of how the Incoterms ® rules system is meant to work. It is, nevertheless, important to see the differences between the terms, with this in mind we will take a brief look at the 3 “F” terms to highlight their essential differences. First of all note that the FAS and FOB terms are intended to be used only for “conventional” sea freight whereas FCA can be used for any mode of transport FCA Free Carrier named place Main points are that this is a multimodal term used for any mode of transport, main freight is paid by the buyer and cost and risk pass at the named point. Export documentation suitable for clearing the goods for export is the responsibility of the seller.  It is important that the buyer gives clear instructions to the seller as to the point of delivery and that both parties agree the separation of any costs that may arise other than those considered normal in such transactions. Real-life example:  The UK seller of goods consigned via air freight FCA (Forwarder’s premises) to an Australian destination. The seller claimed that as they delivered to the forwarders warehouse with the appropriate documentation for customs clearance he should not be charged a ‘handling fee’ by the forwarder. A further question arose with regard to other potential fees for storage and aviation security charges. The dispute was resolved when after considering the wording of Incoterms ® rules it was felt that handling related to customs clearance and should be paid by the seller. Storage in the event of delays in consigning the goods should be to the buyers account as the forwarder is acting for the buyer. Aviation security is arguably a national restriction which should be to the sellers account.   FAS Free alongside ship named port of shipment Main points are that this term must only be used for conventional sea freight or inland waterway modes of transport, main freight is paid by the buyer, cost and risk pass to the buyer when the goods are delivered to the named point. Real- life example:  Seller of the goods delivers to the named port on a Tuesday despite the vessel not loading until the Thursday. On the Wednesday the goods are destroyed in a fire. Who had responsibility for the risk?  The simple fact of the matter was that the seller had not placed the goods alongside the ship as the term dictates, the ship was not there, in the absence of any other considerations such as port practice it had to be that the seller was at risk as delivery had not been achieved in line with the term. The buyer is responsible for giving proper instructions to the seller in respect of delivering the goods to the named point, if the seller is not clearly instructed clarification is required. FOB Free on Board named port of loading Main points are the same as FAS except that delivery takes place and cost and risk pass when the goods cross the ships rail at loading at the port of shipment. FAS and FOB are clearly intended for conventional sea freight (or inland waterway) modes of transport.   Finally the ICC have decided to get rid of the rather dated concept of the ship’s rail point of delivery as the named legal delivery point and where risk passes to the buyer.  These points (after 74 years) are now, under the Incoterms ® 2010 rules when the goods are loaded.  A very high proportion of world freight tonnages is containerised and not handled  by conventional sea freight techniques so other alternatives to the ships rail delivery point are available. Real-life example:  Lancashire seller of textile goods delivered to the port nominated by his USA client but found that the vessel nominated by the buyer was late arriving in port. The seller incurred considerable cost for storage and demurrage charges, the buyer refused to accept these charges and arbitration was called for. It was held that the buyer had failed in his obligation to inform the seller as to the time and place that the vessel was available for loading. The buyer was obliged to pay the additional charges. Those involved in the sale and purchase of goods internationally benefit enormously from having the comfort and protection of Incoterms ® rules, however there is still the need to take account of methods of transport, port practices and the possible advantage for the particular transaction of one Incoterms ® rule over another in terms of security under the contract and ability to meet the obligations of the individual term.

UK/ EC Export Documents & Procedures

Exporting to countries outside the European Community (EC) can be daunting so a planned, structured appropriate is essentials. Strong & Herd LLP are publishing some key points to help in the practical movement of goods, to ensure you are compliant and, also, to ensure key elements of the international trade agreement are not forgotten.

Exporting doesn't end with the order being received, practical issues must be addressed such as which documents do we need: what information must go on the forms, do we need anything special, have we organised the transport in a cost effective way, are we using an Incoterm that helps us rather than cause us problems? All of these issues are covered in our Export Training courses.

Here are a few tips:

1. Check the trade relationship between the EU and your clients' countries. The EU has negotiated preferential trade agreements with lots of overseas countries which allow goods made in the EU (which meet the qualification rules) to enter these countries at a reduced - often zero - rate of customs duty. This gives EU/UK manufacturers an advantage over non-EU companies. The new Free Trade Agreement coming into for on 1 July 2011 is the EU-S.Korea FTA.

2. Make sure the Incoterms rules in the contract, eg FCA, FOB, CIF, DDU, DAP, are clearly understood and that you don't do more than you are legally obliged to do. Also, makes sure you understand the full implications of what your company has agreed too - ie DDP requires you to be registered in your customers' countries so you can organise the import customs clearance and pay relevant duties and taxes.

3. Clear description of goods on the paperwork is essential. Most shipments move internationally under cover of an invoice, and this document is important because it will be seen by all parties in the supply chain. Just having part numbers or abbreviated descriptions is not helpful - at the very least there should be a plain language general description.

4. A lot of companies use system generated invoices which includes pre-loaded commodity codes (aka tariff numbers). EU Customs require a 8-digit commodity code (called the Combined Nomenclature - CN) to be made on the export declaration. Some companies show the 10-digit EU import commodity code (TARIC) on export paperwork. Remember only the first 4 or 6 numbers will match the code numbers applicable in other countries. This is under the Harmonised System (HS) Codes. Be aware that if you show full UK/EU commodity codes on the invoice you may get questions from the customer's country.

5. Value of goods - you must always show the true value of the transaction on an export invoice. Do not be tempted to under declare a value because an overseas customers says "it will help the goods get through customs quicker". There is some confusion when goods are shipped free of charge; following the WTO/GATT valuation rules for imports if there is no charge you must still price the goods at a true costs, following the principles of a) indentical pricing (not being sold this time); b) similar goods; c) cost of materials/overheads and profit.

6. Evidence of export. Under UK VAT rules you are allowed to VAT zero-rate an export, but you must be able to provide evidence that the goods have left the UK. This evidence must be in the exporting companies name (or cross-reference to them as the supplier) and show that the goods left the UK within 3 months of despatch or payment received (whichever is first). This can cause problems to exporters if they sell ExWorks as the overseas buyer is then in control of the export.

7. In the UK HM Revenue & Customs (HMRC) use an electronic export customs presentation system called NES (the National Export System) based on EU SAD Form which replaced the paper C88 Form. NES links to the customs computer CHIEF and records all exports. It is recommended that exporters receive a copy of this declaration from freight companies.

8. Indirect exports from the UK, via other EU member states, to non-EU countries must be tracked on the electronic system with a Movement Reference Number (MRN) issued on the Export Accompanying Document (EAD). Exporters who ship goods, for example, by road to Switzerland, Russia, Ukraine, etc must ensure they receive the MRN. This can be check on the Europa Database under Export.

9. Don't confuse "origin" of goods with "preference" - though preference rules use origin as a starting point the qualification regulations under preference are more than just that the goods were made in the EU. Additional rules of preference include a percentage of EU components, materials requiredin the manufacture, a named process to take place in the UK/EU, a change of commodity code between materials and finished goods or a combination of all three. The preference rules depends on the customer country and the commodity code of the goods.

10. Export licensing controls affect the supply of certain goods - though only about 5% of exports from the UK are controlled there are embargoes and sanctions to check. If your goods are of a high capability or technology level that could be used in a military, nuclear, space environment or have been specially designed, modified or reconfigured for millitary/ defence use then you will have to check the export licensing regulations . And, if your technology or goods originate from the USA you may also require US Department of Commerce or Department of Defence approval to re-export.

Are Incoterms Perfect?

Also see our Incoterms-2010 blog for debates just on Incoterms 2010.

It is interesting to consider the point that the Incoterms ® Rules are not intrinsically perfect despite the many revisions that have taken place since 1936. They are certainly a brave and robust attempt to provide an international trade language to define where delivery takes place legally in supply contracts. That is not to say that in the wide and complicated world of international trade there are not some inconsistencies and disagreements as to the interpretation of some elements of individual terms.

The ICC publication ‘The Incoterms 2000 Forum of Experts’ (Publication No. 617) is a transcript of the international forum held in Paris in September 1999 to launch the latest version. It illuminated some of the difficulties of interpretation but in the overview to the publication it stresses that Rules are the perfect illustration of a global standard, elaborated by business to respond to the need of business to provide flexible rules for governing its activity. We hope to receive a similar overview to the new 2010 set.

Terms that businesses appear to struggle with when trying to put them into practical use are ExWorks, FCA, the 4 remaining sea freight terms (FAS, FOB, CFR, CIF)and Group C in general. Why isn't Exworks suitable for international trade? If it isn't suitable why didn't the ICC take it out of the new Incoterms 2010 set? Why must a seller not only be responsible for export customs clearance but also have to pay for it under FCA Seller's Premises? And, how in practice, does a seller pay for export customs clearance when using air express operators such as UPS, TNT, DHL and Fedex who do not split down the costs? Why can't I have goods moving in a sea freight container delivered on board the ship under FOB - why must it be FCA port of departure? Moving away from FOB increases the costs and risks of the buyer?

We could go on. It appears to some that in the new set of Incoterms the ICC are hoping to shape the way international trade uses delivery terms rather than following what the international trading companies actually do. Incoterms Training is essentials and it must be done for the business as a whole not just a couple of logistics people. Incoterms in sales contracts and the use of Incoterms in purchasing departments should be given a higher profile than it appears to have in the majority of businesses.

Incoterms 2010

As you will be aware the ICC has up-dated Incoterms - the international delivery terms. The old version - Incoterms 2000 - was updated in 2010 and from 1 January 2011 Incoterms 2010 came into force. Two new terms have been added - DAT and DAP - while the terms DAF, DES, DEQ and DDU have been removed. The ICC Incoterms 2010 are now suitable for domestic contracts. A lot of the other changes are, what we would call, "tweaks" but there are significant "tweaks" within each of the 4 Incoterms Groups - Group E, Group F, Group C and Group D. ExWorks is recommended for domestic use only. FAS, FOB, CFR and CIF is recommended for non-containerised freight only and, for FOB, CFR and CIF, the risk passes once the goods are loaded on board not when they cross the ship's rail at loading. The diffferences between the transfer of risk and the costs within Group C (Incoterms CPT, CIP, CFR, CIF) has been clarified.

While you are here, look at our Incoterms 2010 blog

For further information on Strong & Herd Incoterms services, including Incoterms 2010 books, Incoterms 2010 charts and Incoterms training visit: www.strongandherd.co.uk/incoterms-2010/

Revising Incoterms 2010

As you will be aware the ICC is currently in the process of revising "Incoterms 2000". Under the current schedule, the Incoterms Drafting Group have been meeting since end of 2009 to discuss the proposed changes to Incoterms and it is...

Read more about Revising Incoterms 2010