International Commercial Terms Used in Sale Contracts

Abstract – The current scenario of judicial system of Pakistan, after restoration, can put strong impact on the organizational effectiveness through a proper watch and security as means of resistance to the fraud, and accountability of the organizations to enhance competitiveness through proper merit. The research defines the theory that strong system of judiciary is necessary to supervise the working. It is believed that and mentioned by highly regarded lawyers and the corporal spokesmen that the current downfall of the industrial and corporate sector of Pakistan is due to the low sense of organizational security and lacking a strong forum to defend their rights. The research evaluates the fundamental impacts and conclusions devised from scoring a strong judiciary in Pakistan.

I. INTRODUCTION

The economic market and trade traffic of this century beyond doubt consists of single universal market.  The Buyers and Sellers most of the times find themselves on different continents in different parts of the world, they communicate by having a uniform and homogeneous set of trading, chiefly known as International Commercial Terms (INCOTERMS) to help understand and route properly through international transactions and also clarify each of the Buyer’s and Seller’s role in this supply chain of trade and transactions.

INCOTERMS are a series of various international sales terms, which were first, published by International Chamber of Commerce (ICC) back in 1936, and then in the present dates of 2000, 2009 and now 2010. In the early 1900’s, many of the international traders, who were situated in diverse regions of the world, devised a set of short abbreviations used for certain frequently practiced trading terms.  On the other hand, due to disparity in culture, associations, language and syntax, knowledge and experience, translations and linguistics, these trading terms had dissimilar meanings for these diverse global members of trade.  The rise in confusion and common errors became a consistent stamp and a constant risk in international trading and shipping.  For that reason, in order to encourage consistency and eliminate confusion, the International Chamber of Commerce (ICC) in 1936 developed one standard and homogeneous set of IN-(International)-CO-(Commercial)-TERMS for the traders worldwide to accept and practice.  Since then, these INCOTERMS have played a key role in global business of exchange and these terms specifically address certain key responsibilities and compulsions, and help institute momentous and considerable “markers” along the chain of the micro-logistics mechanism.

There basic use is to define the relationship between the buyer and the seller, regarding the mode of delivery and to justify the member who is supposed to arrange for customer clearances and licenses. Along with the passage of title, these terms are used to clarify as either who has to obtain insurance of the goods and merchandise during the transport, generally known as the transfer of risks and insurance responsibilities. From the delivery terms to the justified delivery completion and how the costs will be allocated between the parties are all covered in these sets INCOTERMS.

INCOTERMS GROUPS AND UTILITIES

There are a total of 13 International Commercial Terms (INCOTERMS), which are categorized to four major groups in order of their utility and comprehension;

(i) Group – E (Origins Group)

(ii) Group – F (Carriage NOT PAID by the Seller)

(iii) Group – C (Carriage PAID by the Seller)

(iv) Group – D (Arrival at the Stated Destination)

From the warehouse to the destination of the delivery, there are almost 12 milestones or checkpoints in the transport pattern. For the comprehension of the merchandise transport track, the milestones (in order of the precedence) are:

(1) Warehouse storage at origin

 (2) Warehouse labor at origin

 (3) Export packing

 (4) Loading at origin

 (5) Inland freight

 (6) Port receiving charges

 (7) Forwarders fee

 (8) Loading on ocean carrier

 (9) Ocean/Air freight chargers

 (10) Chargers at foreign shipping-port or the airport

 (11) Customs, taxes and duties abroad, and finally

 (12) Delivery charges to final destination

We may use these checkpoints to analyze the maximum level of responsibilities for Buyer and Seller in the respective groups.

A. Group – E

The letter “E” is short for Ex-Works (Ex means “from” and Works means “factory or warehouse”), where a named place for shipment is available to the Buyer, not the Seller. And the Seller will not contract for any transportation. The abbreviation for this group is EXW and an added location name is tagged with it, for example, EXW Qasim Port.

The main feature of this group is that the Seller represents to make the merchandise available at his own property/site to the Buyer.  Once the Buyer picks up the goods, the Seller’s duties and obligations are completed and fulfilled.  Obviously, this is a situation where the Seller has very few obligations and has an extremely low level risk of losses and the title is transferred almost immediately in the supply chain.  Almost from the beginning, Buyer ultimately bears the risk of losses and has to insure and tolerate with all the hazards of the complete transport. Some manufacturers also use the term Ex-Factory, which is as same as Ex-Works.

Using the checkpoints above, it is easier to understand now that the Seller is responsible from Checkpoint – 1 to Checkpoint – 3, and the Buyer is responsible from

Checkpoint – 4 to Checkpoint – 12. In some practices, it is common that the Seller loads the goods on truck or the container without charging the loading fees; Checkpoint – 4.

B. Group – F

The letter “F” is short for the word Free, and this group includes terms mentioned here in order of precedence and responsibilities on Seller,

(i) FCA (Free Carrier)

(ii) FAS (Free Alongside Ship)

(ii) FOB (Free On-Board)

The essential characteristics of this group are that Buyer and Seller have agreed that the Seller is responsible to deliver the merchandise to a carrier or location designated by the Buyer.  Again, once the Seller has effectuated delivery to the specific location then Seller’s responsibilities cease and the Buyer’s obligations tend to begin.

B. I. FCA (Free Carrier)

The FCA (Free Carrier) is added with the name of point of departure or loading with it, for example, FCA Lahore. Generally, under this term, the delivery of goods on truck, rail car or container at the specified point (depot) of departure, 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. Some manufacturers also use the terms

FOT (Free On-Truck) and FOR (Free On-Rail).

The FCA term is further divided in to two types; one is the FCA Seller’s Premises, where the Seller is responsible only for loading the goods and not responsible for inland freight. This carries the responsibilities of Seller from Checkpoint – 1 to Checkpoint – 4 only, and the Buyer has obligations from Checkpoint – 5 to Checkpoint – 12. The second FCA term is FCA Named Place (International Carrier) where the Seller is responsible for the Inland Freight. This carries the responsibilities of Seller from Checkpoint – 1 to Checkpoint – 5, and the Buyer’s obligations from Checkpoint – 6 to Checkpoint – 12.

B. II. FAS (Free Alongside Ship)

The FAS (Free Alongside Ship) is added with the named port of origin, for example, FAS Karachi. This term is popular for the break-bulk shipments and with the importing countries using their own vessels. The FAS requires the Seller to clear goods for export, which is a reversal from previous practices. 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 freight charges, cargo insurance, and all other costs and concerning risks.

Accordingly to the INCOTERMS 2000, the Seller was responsible from the Checkpoint – 1 to Checkpoint – 6, the Port Receiving Charges, or Terminal Charges. Recently, in INCOTERMS 2010, the Seller is responsible from the Checkpoint – 1 to Checkpoint – 7, up till the forwarder’s fee, which was the obligation for the buyer in INCOTERMS 2010. Now the Buyer has obligations from Checkpoint – 8 to Checkpoint – 12. The Delivery is accomplished when the goods are turned over to the Buyer’s Forwarder for insurance and transportation.

B. III. FOB (Free On-Board)

The FOB (Free On-Board) is added with the named port of origin, the loading vessel, at the Seller’s expense, for example FOB Singapore. Under the rules of INCOTERMS 1990, the FOB term is specifically used for ocean and in-land waterway transportation of goods and products, and the Seller uses his freight forwarder to move the merchandise to the port of designated port of origin.

Although the rule is set that FOB be used for waterways always, but still many importers and exporters still use the FOB term in case of air freights as well. North American exporters and importers have devised some new applications, such as dealing on the open account and consignment basis, using the shipping terms FOB Origin and FOB Destination. The term FOB Origin coins that the Buyer is responsible for the freight and other costs plus risks. And the FOB Destination defines that the Seller is responsible for freight and other costs and risks. These terms are not the part of INCOTERMS and should always be avoided in international trades.

Accordingly to the INCOTERMS 2000, the Seller had responsibilities from Checkpoint – 1 to Checkpoint – 6, and also for Checkpoint – 8: Loading on the Ocean Carrier, and the Buyer had responsibilities of Checkpoint – 7: Forwarders fee and then from Checkpoint – 9 to Checkpoint – 12. Then in INCOTERMS 2010, the Seller now has responsibilities from Checkpoint – 1 to Checkpoint – 8, including the Checkpoint – 7: Forwarder’s fee, and the Buyer’s obligations start from Checkpoint – 9 to Checkpoint – 12.

C. Group – C

The letter “C” is short for the word Cost, and this group includes terms here in order of precedence and responsibilities on Seller,

(i) CFR (Cost & Freight)

(ii) CIF (Cost Insurance & Freight)

(iii) CPT (Carriage Paid To…)

(iv) CIP (Carriage & Insurance Paid To…)

The essential characteristics of this grouping are that the Seller is obligated for contracting and paying for the transportation of goods but has no obligation to bear additional costs nor has to bear any risk of loss once the goods have been shipped.

C. I. CFR (Cost & Freight)

The CFR (Cost & Freight) is added with the named port of destination, at the Seller’s expense, for example CFR Karachi. Under the rules of INCOTERMS 1990, the term is chiefly used for ocean freights only. But still, many practice this term for air freight trade as well.

This term refers towards two distinct and separate responsibilities; first one is dealing with the actual cost of merchandise, “C” and the other one, “F” refers to the freight charges to a predetermined destination point. It is the Seller’s responsibility to get goods from their door to the port of destination, and delivery is completed at this time. It is then the Buyer’s responsibility to cover insurance from the port of origin or port of shipment to the Buyer’s door. Provided that the Seller is responsible for transportation, the Seller also chooses the forwarder.

In this term of CFR, the Seller has responsibilities from Checkpoint – 1 to Checkpoint – 9, and the Buyer has obligations from Checkpoint – 10 to Checkpoint – 12.

C. II. CIF (Cost Insurance & Freight)

The CIF (Cost Insurance & Freight) is added with the named port of destination at the Seller’s expense, for example, CIF Dubai. Under the rules of INCOTERMS 1990, the term is primarily dedicated for the use of ocean freight and trade, but as of like other terms, this term is also used for air freight purposes by many traders. This term is arranged similar to the CFR, but instead of the Buyer insuring the products for the marine phase of the voyage, the Seller will assure the merchandise. With this understanding, the Seller usually chooses his own forwarder, and the delivery is accomplished at the port of destination.

In this term of CIF, the Seller has responsibilities from Checkpoint – 1 to Checkpoint – 9, and the Buyer has his obligations started from Checkpoint – 10 to Checkpoint – 12.

C. III. CPT (Carriage Paid To…)

The CPT (Carriage Paid To…) is added with named place of destination (discharge) at the Seller’s expense, for example CPT Manhattan. In CPT transactions, the Seller has the same obligations found with the term CIF, in addition that the Seller has to buy cargo insurance, naming the Buyer as the insured while the goods are in transit.

The term of CPT is configured to adjust responsibilities of Seller from Checkpoint – 1 to the Checkpoint – 10, and the Buyer has obligations from Checkpoint – 11 to Checkpoint – 12.

C. IV. CIP (Carriage & Insurance Paid To…)

The CIP (Carriage & Insurance Paid To…) is added with the named place of destination at the Seller’s expense, for example CIP Los Angeles. This term is primarily used for multimodal transport, because it relies on the carrier’s insurance. The Seller is only required to purchase minimum coverage. When this particular agreement is in force, Freight Forwarders often act in effect, as carriers. The Buyer’s insurance is effectual when the goods are turned over to the Forwarder.

The term of CIP covers the responsibilities of Seller from Checkpoint – 1 to the Checkpoint – 10, and the Buyer has obligations from Checkpoint – 11 to Checkpoint – 12. The Buyer has responsibilities for customs, duties and taxes and all the delivery charges at the final destination.

D. Group – D

The letter “D” is short for the word Delivery/Delivered, and this group includes terms mentioned here in order of precedence and responsibilities on Seller,

(i) DAF (Delivery-At-Frontier)

(ii) DES (Delivered Ex-Ship)

(iii) DEQ (Delivered Ex-Quay)

(iv) DDU (Delivered Duty Unpaid)

(v) DDP (Delivered Duty Paid)

This grouping is exactly the opposite of the Group – E.  In other words, the Seller has all the obligations of costs, risks, insurance, duties etc. and must make the merchandise available at the named place of destination, which is usually named by the Buyer and may also be the Buyer’s factory.

D. I. DAF (Delivery-At-Frontier)

The DAF (Delivery-At-Frontier) is added with the specified named point at frontier at the Seller’s expense, for example DAF Hong Kong. In this term, the Seller’s responsibility is to appoint a forwarder to take goods to a named frontier, which is usually a border-crossing point, and clear them for export and the delivery occurs at that time. The Buyer’s responsibility is to arrange with their forwarder for the pickup of the goods after they are cleared for export, carry them across the border, clear them for importation and effect delivery. In most cases, the buyer’s forwarder handles the task of accepting the goods at the border across the foreign soil.

In this term, the Seller has his responsibilities from Checkpoint – 1 to Checkpoint – 10, and the Buyer has obligations from Checkpoint – 11 and Checkpoint – 12.

D.II. DES (Delivered Ex-Ship)

The DES (Delivered Ex-Ship) is added with the named port of destination at the Seller’s expense, for example DES Osaka. In this type of transaction, it is the Seller’s responsibility to get the goods to the port of destination or to engage the forwarder to the move cargo to the port of the destination unclear. Any destination charges that occur after the ship is docked are the Buyer’s responsibility.

In this term, the Seller has responsibilities from Checkpoint – 1 to Checkpoint – 9, and the Buyer has responsibilities from Checkpoint – 10 to Checkpoint – 12.

D. III. DEQ (Delivered Ex-Quay)

The DEQ (Delivered Ex-Quay) is added with the named port of destination at the Seller’s expense, for example DEQ Bangkok. In this type of transaction, the Buyer is responsible for duties and charges, and the Seller is responsible for delivering the goods to the quay (dock), wharf (landing stage) or port of destination. In a reversal of DES practice, the Buyer has to arrange for customs clearance also.

In this transaction, the Seller has responsibilities from Checkpoint – 1 to Checkpoint – 10, and the Buyer has obligations from Checkpoint – 11 to Checkpoint – 12.

D. IV. DDU (Delivered Duty Unpaid)

The DDU (Delivered Duty Unpaid) is added with the named point of destination, often the project site or the Buyer’s premises, at the Seller’s expense, for example DDU Vancouver. In this INCOTERM, 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. The seller may opt not to insure the goods at his own risks.

In this term, the Seller has responsibilities from Checkpoint – 1 to Checkpoint – 10 and also for Checkpoint – 12: Delivery Charges to Final Destination. The Buyer has only the responsibility for Checkpoint – 11: Customs, Duties and Taxes Abroad.

D. V. DDP (Delivered Duty Paid)

The DDP (Delivery Duty Paid) is added with the named point of destination, which is again the project site or Buyer’s premises, for example DDP Bujumbura. The DDP terms tend to be used in intermodal or courier-type shipments. The Seller is responsible for dealing with all the tasks involved in moving goods from the manufacturing plant to the Buyer’s door. It is the Seller’s responsibility to insure the goods and absorb all costs and risks including the payment of duty and fees.

In this term of transaction, the Seller has all the responsibilities from Checkpoint – 1 to Checkpoint – 12.

INTERNATIONAL TERMS OF PAYMENT

There are four basic International Terms of Payment, based on the methods of payment, the time of payment and the risks associated with them to either Seller or the Buyer. These methods are sorted, in order of the risks associated towards the Seller, from least to most:

(i) Cash in Advance (No Risk to Seller)

(ii) Letter of Credit (L/C)

(iii) Drafts

(iv) Open Account (No Risk to Buyer)

Whenever International Terms of Payment are established, it is necessary to consult the personal financial advisor or the banker and shipper to determine and analyze the best, suitable option with benefits.

A. Cash in Advance

The Buyer pays the cash before the shipment is made, and goods are available to the Buyer after the payment. In this mode of payment, there is no risk associated to the Seller, but complete set of risks associated with the Buyer, because he relies on the Seller that the goods are shipped as exactly expected, ordered and quoted.

B. Letter of Credit (L/C)

Letters of Credit require total accuracy in conforming to terms, conditions, and documentation. There is a Confirmed and Unconfirmed Irrevocable Credit, types of L/C. In the Confirmed Irrevocable Credit, the payment is made after the shipment and the documents are then presented to the bank.

C. Drafts

D. Open Account

DIFFERENCE OF THE CONTRACT AND

THE INCOTERMS

The difference between the INCOTERMS and a contract is of high significance, as many may confuse these terms to be some sort of a contract. INCOTERMS are only a means of communication and a unit of conciliation between two parties involved in the exchange, it is not a contract. To be even clearer, these terms do not constitute a contract between the buyer and the seller. Even if there is a condition that the two parties have no contractual agreement between them, they can still mutually agree on INCOTERMS and these terms do not establish a legal binding between the two as a contract. Instead, the two parties have to set up a separate contract for the purchase-sale transaction and part of the obligations and understandings of those parties, based upon this separate contract, are embodied in INCOTERMS, forming a legal binding now. Specific use of INCOTERMS must be positively and acceptably involved between the parties as they will not be implied in any transaction. In the case of dispute and conflict between the parties, the conventional, time-honored courts would consider Sales Contract initially, is there is any available, and after that they consider the Course of Performance, the Course of Dealing and then the Industry Standards. Some additional factors may even be considered that either which entity has possession, whether payment has been made or not and what INCOTERMS have been used.

It is clear that INCOTERMS are not the contract and are not the legal definition and will never, on their own, define the intent of the parties. They neither define the contractual rights, nor the liabilities and/or obligations between the parties. INCOTERMS do not specify the transport details regarding the transfer and delivery of the products, and most importantly, INCOTERMS are not liable to protect a party from his own risk of loss.