Q & A’s – North American Terms vs. INCOTERMS

| DRC

Q. We are a Canadian company who recently started to import citrus from Spain and South Africa. We’ve asked our suppliers to ship the goods on delivered basis because we don’t want to be responsible for any transportation issues. Looking at the terms of sale printed on the different Bills of Lading from various suppliers, we’ve seen CFR or CIF. How does this affect us in the event of a transportation claim?

A. (Answer provided by Trading Assistance Staff

You may have heard about or seen International Commercial Terms or INCOTERMS such as FOB, EXW, CFR, CIF. While you may be familiar with some of them, it is important to understand what they mean. The INCOTERMS were developed to avoid costly misunderstandings by clarifying the tasks, costs and risks in the International delivery of goods from sellers to buyers. According to the latest publication from the International Chamber of Commerce (ICC), these three-letter trade terms include:

Rules for any mode of transport:

EXW: Ex Works – Risk of transit is on the buyer when product is at the disposal of the buyer.

FCA: Free Carrier – Risk of transit is on the buyer when the product has been delivered to the carrier.

CPT: Carriage Paid To – Risk of transit is on the buyer when the product has been delivered to the carrier.

CIP: Carriage and Insurance Paid to – Risk of transit is on the buyer when product has been delivered to the carrier.

DAT: Delivered at Terminal – Risk of transit is on the seller when product is placed at the disposal of the buyer at the place of named destination.

DAP: Delivered at Place – Risk of transit is on the seller when product is placed at the disposal of the buyer at the place of named destination.

DDP: Delivered Duty Paid – Risk of transit is on the seller when product is placed at the disposal of the buyer at the place of named destination but also has to pay any duty for both export and import and customs.

Rules for sea and inland waterway transport:

FAS: Free Alongside Ship – Risk of transit is on the buyer when the product is delivered to the named port of shipment.

FOB: Free on Board – Risk of transit is on the buyer when the product is (delivered to the named port of shipment.)

CFR: Cost and Freight – Risk of transit is on the buyer when the product has been delivered to the carrier but the seller is responsible to arrange and pay for costs and freight to the named port of destination.

CIF: Cost, Insurance & Freight – Risk of transit is on the buyer when the product has been delivered to the carrier but the seller is responsible to arrange and pay for costs, insurance and freight to the named port of destination.

The INCOTERMS are used in international commercial transactions to move product from point “A” to point “B”. They are not however consistently used in the produce business within North America. Instead, “F.O.B.” and the term “Delivered” and some variances of these terms have been adopted as the terms most commonly used for inland transportation within North America. These North American variations of the trade terms can be found in Section 20 of DRC’s Trading Standards found at fvdrc.com should you wish to compare terms used in North America to the INCOTERMS found at iccwbo.org.

To answer your question, in the absence of an agreement on the terms of the transaction, the official documents of the transaction and DRC’s default rules will be used to establish the contract. In the event of a transportation problem, the information on the Bill of Lading is considered the contract between the transportation company and whoever is responsible for the risk in transit. In your case, CFR (Cost and Freight) and CIF (Cost, Insurance and Freight) indicate the risk of transit is on the buyer. Technically, if you continue using these terms, in the event of a transportation dispute, you would be responsible for paying the shipper/seller in full and filing the claim with the transportation firm. We strongly suggest that when dealing with product shipped by maritime transportation that you make sure that you and your supplier are in agreement regarding the risk of transit. Successfully resolving any claim requires that everyone work together. Transparency and agreement are essential in establishing rights and responsibilities of all parties. Lack of agreement and confusion over terms may not only cost you money, but valuable trading partners as well.