By Group 2 Kumarappa.m Hariharan.r Arun.

 The Incoterms or International Commercial

terms are a series of pre-defined commercial terms.

Published by the International Chamber of commerce

(ICC) widely used in international commercial transactions.

A series of three-letter trade terms related to common

sales practices

Necessity of Incoterms
The Incoterms rules are intended primarily to clearly

communicate the tasks, costs and risks associated with the transportation and delivery of goods.
The Incoterms rules are accepted by governments,

legal authorities and practitioners worldwide.

They are intended to reduce or remove altogether

uncertainties arising from different interpretation of the rules in different countries.

Terms for Any Mode(s) of Transport

EXW Ex works

EXW means that a seller has the goods ready for collection at his premises (works, factory, warehouse, plant) on the date agreed upon. The buyer pays all transportation costs and also bears the risks for bringing the goods to their final destination. The Ex Works term is often used when making an initial quotation for the sale of goods without any costs included.

FCA Free Carrier

The seller hands over the goods, cleared for export,

into the disposal of the first carrier (named by the buyer) at the named place. The seller pays for carriage to the named point of delivery, and risk passes when the goods are handed over to the first carrier.
CPT Carriage Paid To
The seller pays for carriage. Risk transfers to buyer

upon handing goods over to the first carrier.

CPT Carriage Paid To

The seller pays for carriage. Risk transfers to buyer

upon handing goods over to the first carrier. CIP Carriage and Insurance Paid
Seller pays for carriage and insurance to the named

destination point, but risk passes when the goods are handed over to the first carrier.

DAT Delivered at Terminal

Seller pays for carriage to the terminal, except for costs

related to import clearance, and assumes all risks up to the point that the goods are unloaded at the terminal.

DAP Delivered at Place

Seller pays for carriage to the named place, except for

costs related to import clearance, and assumes all risks prior to the point that the goods are ready for unloading by the buyer.

DDP Delivered Duty Paid

Seller is responsible for delivering the goods to the

named place in the country of the buyer. Pays all costs in bringing the goods to the destination including import duties and taxes. This term places the maximum obligations on the seller and minimum obligations on the buyer.

Terms for Sea and Waterway Transport

FAS Free Alongside Ship
The seller must place the goods alongside the ship at the

named port. The seller must clear the goods for export. Suitable only for maritime transport but NOT for multimodal sea transport in containers. This term is typically used for heavy-lift or bulk cargo.

FOB Free on Board The seller must load the goods on board the vessel nominated by the buyer. The seller must clear the goods for export. The buyer must instruct the seller the details of the vessel and the port where the goods are to be loaded. CFR Cost and Freight Seller must pay the costs and freight to bring the goods to the port of destination. Risk is transferred to the buyer once the goods are loaded on the vessel. Insurance for the goods is not included.

CIF Cost, Insurance and Freight

Exactly the same as CFR except that the seller must in

addition procure and pay for the insurance.

Documentary Credit (LC)

A documentary credit is a written undertaking by a

bank at the request of an importer/buyer in favour of an exporter/seller whereby the bank agrees to pay against bills of exchange.
Also called Letter of Credit (LC) arrangement.

In US this arrangement is called Commercial Letter

of Credit.

1998 version Sample Letter of Credit

Types:
Revocable,
Irrevocable, Confirmed,

Unconfirmed
Transferrable, Standby, Revolving, Back-to-Back,

 revocable
A revocable letter of credit can be changed or

cancelled by the bank that issued it at any time and for any reason.
Irrevocable An irrevocable letter of credit cannot be changed or

cancelled unless everyone involved agrees. Irrevocable letters of credit provide more security than revocable ones

 Confirmed and unconfirmed letters of credit

When a buyer arranges a letter of credit they usually

do so with their own bank, known as the issuing bank. The seller will usually want a bank in their country to check that the letter of credit is valid. For extra security, the seller may require the letter of credit to be 'confirmed' by the bank that checks it. By confirming the letter of credit, the second bank agrees to guarantee payment even if the issuing bank fails to make it. So a confirmed letter of credit provides more security than an unconfirmed one.

 Transferable letters of credit

A transferable letter of credit can be passed from one

'beneficiary' (person receiving payment) to others. They're commonly used when intermediaries are involved in a transaction.
Standby letters of credit A standby letter of credit is an assurance from a bank

that a buyer is able to pay a seller. The seller doesn't expect to have to draw on the letter of credit to get paid

 Revolving letters of credit A single revolving letter of credit can cover several

transactions between the same buyer and seller.

Back-to-back letters of credit Back-to-back letters of credit may be used when an

intermediary is involved but a transferable letter of credit is unsuitable.

Procedures: Documentary Credit application:

1. The buyer and the seller set out the terms and

conditions of the transaction in a contract of sale. 2. The importer requests his bank to establish the documentary credit. *If the bank feels that the financial exposure is too high, it may require additional security in the form of sureties.

Contd
3. The bank issues the documentary credit in

conformity with the applicants instructions and sends it to its overseas correspondent (the advising bank). 4. The advising bank hands the documentary credit to the beneficiary. 5. The beneficiary ships goods and prepares the documentation. 6. On receipt of a drawing that meets the requirements of the documentary credit, the negotiating bank pays the beneficiary.

Contd
7. The negotiating bank submits the documents to the

issuing bank and claims reimbursement. 8. The issuing bank will check and confirm the compliance of the documents against the documentary credit. The documents, if in order, will be forwarded to the applicant against payment of the amount claimed by one negotiating bank.

Costs:
The fees for processing documentary credits include

local and foreign bank charges. Establishment charges, advising commission, confirmation costs, negotiating fees, deferred payment charges, reimbursement fees and discount charges. Charges vary from bank to bank and the importer and exporter must decide who will pay the costs. The applicant is responsible for all charges if the beneficiary refuses to accept them.

To be noted... (Banks)
Banks deal in financial and commercial documents

and not in goods. Not liable for any breach of the terms of the contract of sale or purchase. The bank is not liable for errors, omissions or delays in transmissions.

Uniform customs and practice for documentary credit(UCP 600)

UCP 600 are the latest revision of the Uniform

Customs and Practice that govern the operation of letters of credit. UCP 600 is in effect from 01 July 2007 The 39 articles of UCP 600 are a comprehensive and practical working aid to bankers, lawyers, importers , and exporters, transport executives, educators, and everyone involved in letter of credit transactions worldwide

Hot Question?
If letter Mis-spelled or any mistake occurs in

Incoterms while preparing the contract, it leads to huge loss for buyer or seller. Justify