INCOTERMs 2010

RESIDENTIAL VENTILATION / TECHNOLOGY SOLUTIONS / DISPLAY MOUNT SOLUTIONS / RESIDENTIAL HEATING & COOLING / COMMERCIAL AIR SOLUTIONS
INCOTERMs 2010
To help better understand the INCOTERMs and how they play a role in international trade
Andy D’Amato / Adamato@linearcorp.com
Copyright © 2012 Nortek Inc. All rights reserved.

What are INCOTERMs?
 INCOTERMs are a series of pre-defined three digit alphabetic terms that are widely
used in international trade.
 They are accepted by governments, legal authorities, and customs offices
worldwide.
 First published in 1936 by the International Chamber of Commerce (ICC)
 They stand for INternational COmmercial Terms
 The latest edition of the INCOTERMs was updated in 2010, hence the name
INCOTERMs 2010. They are updated roughly every ten years with the last edition
being INCOTERMs 2000.
 The rules of the INCOTERMs help to clearly define what obligations both the buyer
and the seller are responsible for throughout the import/ export process.
 They help to avoid any costly disagreements or misunderstandings by listing the
roles of each entity in the transaction
 They cover the areas of: Arranging transportation to each point of the shipment,
procuring insurance, paying transport costs, loading/ unloading of goods, clearing
for export, and clearing for import

What INCOTERMs are NOT
 INCOTERMs are not legally binding. Although they may be used in courts of
international law to help settle disputes, they themselves are not considered
“law”
 They do not define title transfer and ownership of goods. This must be
clearly defined in the sales contract between buyer and seller.
 INCOTERMs do not replace or constitute a contract. It is common in business
to have sales contracts defined separately.
 They do not supersede the laws of government agencies.
 They do not address the price payable, currency, or payment terms on a
transaction

List of INCOTERMs 2010
 INCOTERMs by Air, Road, Rail, Sea, or Multimodal
 EXW – EX Works
 FCA – Free CArrier
 CPT – Carriage Paid To
 CIP – Carriage and Insurance Paid To
 DAT – Delivered At Terminal
 DAP – Delivered At Place
 DDP – Delivered Duty Paid
 INCOTERMs by Sea and Inland Waterways only
 FAS – Free Alongside Ship
 FOB – Free On Board
 CFR – Cost and FReight
 CIF – Cost, Insurance, and Freight

Understanding “Delivered”
 When we hear “Delivered” it is assumed this means when the goods are at
their intended final place of destination
 This is not the case with INCOTERMs
 The term “Delivered” when used in the terms means the threshold where the
costs, risks, and carriage shift from buyer to seller based on the term used.
 “Delivered” can happen at the seller’s warehouse
 “Delivered” means the seller has fulfilled their obligations per the term and is
now the buyer’s responsibility to finish moving/ clearing the shipment.

INCOTERMs destination
 It is important to clearly define the destination where the goods will be
“Delivered”
 This destination is commonly the city of destination where the goods will be
considered “Delivered”
 There are no rules to destination however and you can be as specific as
possible.
 The name of the sea or airport, the name of the destination city, the name of
the warehouse or factory, or the exact name of the storage warehouse are all
examples of destination which defines “delivery” per the term used.
 “Delivered” and “Destination” should always go hand and hand.

Writing INCOTERMs on shipping
documents
 It is required, when writing INCOTERMs, to follow a specific format to clearly
outline where “Delivery” takes place in the term itself.
 The format is as follows: 1. INCOTERM 2. Year of rule set used 3. Destination
 Example: DDP – INCOTERM 2010 – Tokyo
 Example: DAT – INCOTERM 2010 – Port of Long Beach
 Example: EXW – INCOTERM 2010 – Eastvale, CA (Seller’s warehouse)
 It is important to define which rule set is used as there are no rules
preventing companies from using older rule sets. Often disputes arise when a
buyer is using the 2000 rule set and the seller is using the 2010 rule set. This
makes it clear to both parties exactly which rules are being used.

In depth look at common INCOTERMs
And understanding how to use them in our business

EXW – EX Works
Seller’s Obligations
 Make the goods ready for
collection at the seller’s premises
 Provide assistance to the buyer (At
their cost) to procure an export
license if required and/or
assistance with information to
allow the buyer to clear for export
 Notify the buyer the goods are
available
Buyer’s Obligations
 To collect and load the shipment at
the seller’s premises
 To clear for both export and import
 To obtain an export license (if
required) and provide export
documents (Or pay the seller for
their assistance to obtain the
information required)

Notes about EXW
 The seller is not responsible for provided any of the commercial docs to clear
for export
 The seller is not responsible for loading the truck collecting the shipment. If
the seller does this, it is at the cost, risk, and expense of the buyer.
 Although the seller is obligated to provide the buyer with information in order
for the buyer to clear for export/import, it is done so at the buyer’s cost,
risk, and expense.
 This is not a favorable INCOTERM to use for the Nortek business as must of our
international customs are not able to, or willing to clear for U.S. export.

FCA – Free Carrier
 To either ship the goods to a
named place within the originating
country or load the goods on a
truck appointed by the buyer.
 To clear the goods for export or to
provide export docs to an export
agent selected by the buyer.
 To obtain an export license if
required
 Cover all loss or damages until the
goods have been “Delivered”
 To arrange transport to the final
destination once the goods have
been “Delivered”
 To clear for import and handle/
pay for any import formalities
 Cover all loss or damage from the
point where the goods have been
“delivered” by the seller until they
arrive at the final destination

Notes about FCA
 This term is the preferred term to use for sending goods to a freight
forwarder.
 It allows the seller to control the export of their goods to ensure compliance
with U.S. trade regulations.
 It does not involve the seller in clearing for import in the foreign country.
 Once goods have been “Delivered” the obligations shift to the buyer. In the
event goods have been sitting at a forwarder’s warehouse for weeks and have
become damaged, the buyer would be responsible for filing a claim for loss or
damages since the goods have been “Delivered”, even though they had not
yet been exported.

DAP – Delivered at Place
 To arrange the transport of the
goods from the seller’s premises to
the buyer’s premises or “named
place”
 To clear the goods for export
 Responsible for damage or loss
until the goods arrive
 Must provide export license if
required
 To clear the goods for import
 Unload goods at delivery location

Notes about DAP
 DAP is often used for direct parcel shipments (Direct to customer by UPS for
example)
 Even though per the INCOTERM the seller is responsible for arranging carriage
and paying for the shipping charges, it is a common business practice to
invoice the customer for freight separately. This would be something defined
in the sales contract. This practice is often used when the buyer would like
to use the sellers selected courier and be billed separately for freight.

DDP – Delivered Duty Paid
 To arrange the transport of the goods
from the seller’s premises to the
buyer’s premises or “named place”
 To clear the goods for import and
cover all import formalities and
charges
 Responsible for damage or loss until
the goods arrive at the named place
of delivery.
required
 Must provide import license if
required
 Unload goods at delivery location

Notes about DDP
 DDP should only be used on rare circumstances as it represents the maximum
obligation for the seller.
 DDP can only be used if the seller is allowed to clear for import in the
destination countries. Most countries only allow residents in the destination
country to clear unless you are deemed as a “non resident importer” or NRI.
This is a common practice for DDP shipments to Canada and the seller must
either have a Canadian business entity in order to clear for import or be set
up as an NRI status in order to pay the Canadian government for import taxes.
 DDP shipments to Europe (assuming you are allowed to clear for import) also
insure VAT in additional to duties and other import charges. For companies
who are not VAT registered in Europe, they cannot claim these charges back
and is a loss. Whereas companies who are VAT registered in Europe can claim
100% refund of all VAT paid. This makes any DDP shipment to a European
buyer an unwise choice for a U.S. seller, unless you have an established
business entity in Europe that is VAT registered.
 Because the seller can never fully determined the costs and charges for
importing into foreign countries, DDP is never recommended and DAP should
be used. Otherwise, the seller should expect high import charges (assuming
importing is even allowed in the foreign country)

DAT – Delivered at Terminal
the named port (air or sea port)
 Unload at the named port
 Responsible for damage or loss
until the goods are unloaded at the
named port.
required
 Clear for import
 Arrange inland transport from the
named port to the final destination
 Load the collecting vehicle at the
named port of delivery

Notes about DAT
 DAT is useful if your buyer is importing a number of items to the port and
would like to consolidate collection to make one delivery.
 It helps divide the inland transportation costs between buyer and seller
making it a favorable INCOTERM for both parties. Whereas DAP and DDP the
seller is responsible for inland delivery charges.

CPT & CIP – Carriage (and insurance) Paid To
the named place of delivery
required
 Must provide insurance (When CIP
is used)
 Risks pass at the port of export in
the destination country (before
being loaded onto the vessel) even
though the seller arranges carriage
all the way to the named place of
destination.

Notes about CIP & CPT
 These INCOTERMs are good to use when both the buyer and the seller do not
want the carriage to pass hands throughout the transportation of the goods.
 This reduces risks to the seller as the risks pass to the buyer once the goods
are delivered at the port of export. This can be a happy medium for the
passing of risks.
 Can put the buyer into an awkward situation if there are loss or damages
during the transport to the named place. Since the carriage is arranged by
the seller using their appointed shipping company, it would be up to the buyer
to place the claim for loss or damages. Either way the seller will most likely
be involved in this since it is under their account. In these cases, it is
recommended DAP is used and if insurance is part of the sale, write those
terms into the sales contract and handle insurance outside of the INCOTERMs.

FOB– Free on Board *Ocean only*
 To arrange inland transportation
and loading on the vessel at the
port of export.
required
 Arrange unloading and inland
transportation at the port of
import

Notes about FOB
 FOB is commonly used when procuring goods from overseas.
 It makes the vendor or manufacturer responsible for getting the goods loaded
onto the vessel. This is favorable since the seller is familiar with their own
customs laws and ports.
 It allows the buyer to control the import of their products once the goods
have been loaded onto the vessel. The buyer can then clear for import using
their own broker and arrange inland transport using their own freight service.
This is favorable to buyers in order to control the supply chain and insure
timely deliveries to their warehouses.

Remaining INCOTERMs
 FAS is the same as FOB except the seller is not responsible for loading the
goods onto the vessel. This is not commonly used as buyers typically do not
have the knowledge of the ports in the sellers area and often have to hire a
service to load and make the arrangements for them.
 CFR and CIF are similar to CPT and CIP except can only be used for ocean
transport. CFR makes the seller responsible for arranging carriage and costs
to the port of import, but the risks pass at the port of export. CIF is the same
except the seller must also insure the shipment. FOB is normally the
preferred INCOTERM here since buyers do not want to deal with placing
claims for loss or damage with the sellers freight company.

INCOTERM scenarios
Exercises to help better understand when to use each INCOTERM

Choose from FOB, DAT, DAP, EXW or DDP
 N7 Electronics, a company based out of Riverside, California, is exporting goods to
their customer in Rome, Italy. This shipment will be a parcel shipment consisting
of four cartons to be shipped by a courier service. The Italian customer wants N7
to use their own appointed courier and have agreed to clear for import and pay
VAT (Since they are a VAT registered company) as long as N7 clears export out of
the U.S. The customer would like N7 to arrange transport from their warehouse in
Riverside, directly to their warehouse in Rome.
 What INCOTERM should be used?
 DAP – INCOTERM 2010 – Rome
 The seller will use their appointed courier service to transport their parcel export
directly to the customer in Italy, clear for export, and arrange transport directly
to the customer. Whereas the buyer in Italy will clear for import.

 N7 has purchased a large order from their manufacturer in China of three full
containers of electronics and plans to import them by vessel. They would like
their Chinese partners to arrange inland shipping to the port of Shanghai and load
the vessel. N7 will make contact with their import broker to clear the goods for
import into the U.S. at the port of Long Beach and assume the risks of the
shipment once loaded at the port of Shanghai. Once delivered they will ship the
goods by truck to their warehouse in Eastvale.
 FOB – INCOTERM 2010 – Port of Shanghai (loaded)
 Since the seller has more knowledge of Chinese inland trucking companies and
their ports, it is best to have them make the inland transport arrangements. The
buyer can take over the transaction once the goods have been loaded and
exported out of China since they are skilled at importing into the U.S.

 N7 just signed on a new, large distributor. This distributor is well versed in
exporting from the U.S. and prefers using their appointed trucking service to
collect the goods from N7’s warehouse in Eastvale. They use an export agent to
send the goods from the port of New York to their location in Tel Aviv, Israel. The
buyer has agreed to pay additional costs for N7 to load the truck at N7’s premises.
The buyer will be responsible both for exporting out of the U.S. and importing into
Israel.
 EXW – INCOTERM 2010 – Eastvale (Seller’s warehouse)
 Since the seller is not obligated to provide export docs, clear for export, or even
load the incoming truck EXW is the preferred INCOTERM to use. This alleviates N7
from all exporting responsibilities and puts this on their customer. N7’s only
obligation is the make the goods ready for collection and provide the buyer with
information needed to clear for export.

 N7 has just finished setting up their non-resident importer status in Canada.
They now have a Canadian business number and can begin clearing goods for
import into Canada. They recently made a costly mistake on a shipment to
Windsor, Ontario and in order to save face with their customer, has agreed to
re-ship the order at no charge to freight and to import the order as well. The
customer has no responsibility here other than the unload the shipment once
it arrives on their dock.
 DDP – INCOTERM 2010 – Windsor, ONT
 Since N7 is set up as NRI, they are allowed to sell DDP into Canada and have
selected to do so in this example. If their NRI status had not yet been set up,
they would not be allowed to import to Canada and could only use the DAP
INCOTERM.

Conclusion
 There are many reference materials that can be used when determining
which INCOTERM should be used for each transaction.
 The official INCOTERM book by the ICC should be available for all
employees to use
 More information about INCOTERMs can be found on www.export.gov, the
INCOTERMs handout from this class, the official book, or compliance
employees within Nortek.

INCOTERMs 2010

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