Shipping terms, also known as „delivery terms”, are description of agreed by seller and receiver conditions of the way the goods are shipped. They share duties (e.g. necessity of making custom clearance, insurance coverage, choosing carrier or dealing with loading and offloading process), costs and risk between the parties of agreement
Determinants of choosing shipping term
Among the factors decisive for the choice of shipping term used stands out:
- Transport susceptibility of cargo which can be divided into:
- Natural cargo transport susceptibility which is determined by physical and chemical features of cargo. This kind of susceptibility has an impact on choosing the mean of transport
- Technical cargo transport susceptibility which is related to dimensions and heaviness of cargo. It determines the technique of cargo handling and kind of equipment which is required to move and secure the goods.
- Economic transport susceptibility is understood as the ratio of the transport price to the value of the cargo transported. It determines choosing the mode of transport and then the shipping term related.
- The mode of transport: road transport, rail transport, inland transport, sea transport or multimodal transport can be chosen.
- The range of duties, risk and expenses which seller and buyer can afford to deal with.
- The conditions of payment.
The attempt to classify and systematize the terms of shipping and trade was made by ICC - International Chamber of Commerce in 1936. The organization created the set of rules called INCOTERMS - International Commercial Terms. INCOTERMS has been developing during the years by ICC, the latest version is called INCOTERMS 2010.
Description of INCOTERMS 2010 rules
International Chamber of Commerce created the set of rules consisted of:
- EXW Ex Works
The vendor main and only responsibility is placing the cargo at the disposal of the person who bought it. The buyer at his own risk deals with: choosing carrier and paying transport cost, making custom clearance, insuring the goods.
- FCA Free Carrier
The vendor takes responsibility for the goods and customs formalities till they are delivered to agreed place and picked up by carrier. Then all risks, costs and duties are taken by buyer.
- FAS Free Alongside Shipp
The seller duty is to clear the goods for export and deliver to be placed alongside the vessel at port of shipment agreed by both sides of sales contract. The main carriage is paid and organized by buyer.
- FOB Free On Board
All responsibilities of the seller are similar to FAS rule except that the goods needs to be placed on vessel directly to make vendor free of risk and responsibility for paying costs.
- CPT Carriage Paid To
The risk, costs and duties passes from vendor to buyer when the goods are delivered to the place of destination agreed. The seller pays transport costs, but the risk connected with shipping is taken by buyer.
- CIP Carriage and Insurance Paid To
This shipping terms is similar to CPT except that insuring the goods is among seller tasks.
- CFR Cost and Freight
Passing of risk takes place in the port of departure, when the goods are placed on board the ship. However the seller is the one who bears the cost of maritime transportation.
- CIF Cost, Insurance and Freight
CIF is similar to CFR. The difference lies in obligation to insure the goods by seller.
- DAT Delivered at Terminal
The risk and costs are passed to the buyer after unloading the goods from vessel at the port of destination. Buyer's additional duty is making custom clearance.
- DAP Delivered at Place
Seller is responsible for placing the goods at buyer disposal at buyer's own place (warehouse or terminal chosen). Buyer responsibilities consist of: making custom clearance, dealing with legal formalities of importing the goods.
- DDP Delivered Duty Paid
DDP Incoterms rule expand the range of responsibilities of seller by adding the obligation to clear the goods and deal with custom formalities. The vendor has maximum obligations while the buyer has minimum ones.
Classification of INCOTERMS
INCOTERMS 2010 can be classified different ways concerning e.g. mode of transport used for carriage or range of responsibilities for seller and buyer.
First classification is created according to mode of transport used for carriage. It singles out:
- Group I consisting of: EXW, FCA, CPT, CIP, DAT, DAP and DDP can be used for any mode of transport.
- Group II consisting of: FAS, FOB, CFR and CIF can only be used while maritime transport is chosen for carriage.
Second classification distinguishes four categories :
- E-terms (EXW only) in this rule the seller is obliged to prepare the goods to carriage and enable pickup them from seller's seat.
- F-terms (FAS, FOB) the seller takes responsibility for the goods until they are taken by nominated carrier in place agreed by parties of the agreement. Then buyer takes responsibility risk and further expenses.
- C-terms (CIF, CPT, CFR, CIP) the seller needs to choose carrier and paid for the main carriage from the country of sending to the country of delivery.
- D-terms (DAT, DDP, DAP) makes the seller responsible for delivery to the agreed place of delivery in the country of destination, in compare with previous groups vendor's duties, risk and costs are expanded.
- Malifliet J. (2011), Incoterms 2010 and the mode of transport: how to choose the right term, , Univerisiteit Gent Academic Bibliography, Gent, p.1.
- Lesmian-Kordas R. (2011),Transport susceptibility of cargoes as their classification criterion, , "Scientific Journals Maritime University of Szczecin", nr 26(98), p.60.
- Ramberg J. (2011), ICC Guide to Incoterms 2010 Understanding and practical use, , ICC Services Publications, Paris, p.16.
- Ramberg J. (2011), ICC Guide to Incoterms 2010 Understanding and practical use,  ICC Services Publications, Paris, p. 49-62.
- Ramberg J. (2011), Incoterms 2010,Penn State International Law Review, nr 3, p.420.
- Lesmian-Kordas R. (2011),Transport susceptibility of cargoes as their classification criterion,, "Scientific Journals Maritime University of Szczecin", 26(98).
- Malifliet J. (2011), Incoterms 2010 and the mode of transport: how to choose the right term, Univerisiteit Gent Academic Bibliography, Gent.
- Ramberg J. (2011), ICC Guide to Incoterms 2010 Understanding and practical use ICC Services Publications, Paris.
- Ramberg J. (2011), Incoterms 2010 "Penn State International Law Review", 3.
Author: Sylwia Zych