Shipping terms

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:

1. Transport susceptibility of cargo which can be divided into:
   1. 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
   2. 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.
   3. 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.
2. The mode of transport: road transport, rail transport, inland transport, sea transport or multimodal transport can be chosen.
3. The range of duties, risk and expenses which seller and buyer can afford to deal with.
4. The conditions of payment.

INCOTERMS introducing

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:

1. Group I consisting of: EXW, FCA, CPT, CIP, DAT, DAP and DDP can be used for any mode of transport.
2. 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 :

1. 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.
2. 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.
3. 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.
4. 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.

Examples of Shipping terms

• Delivery Duty Paid (DDP): This is a very common shipping term where the seller is responsible for the delivery of goods to the buyer’s door, including the payment of all applicable customs duties and taxes.
• Free On Board (FOB): Under this term, the seller is responsible for the delivery of goods to the buyer’s port of destination, but the buyer is responsible for the cost of loading and unloading the goods from the vessel.
• Cost Insurance Freight (CIF): This term is similar to FOB, but the seller is additionally responsible for the cost of marine insurance and the freight costs.
• Free Carrier (FCA): Under this term, the seller is responsible for delivering the goods to a carrier or other nominated person at an agreed location, but the buyer is responsible for the cost of loading and unloading the goods from the carrier.
• Ex Works (EXW): This term is the simplest and most minimalistic of all the terms. It means that the seller is only responsible for making the goods available to the buyer at the seller’s premises. All other costs and risks are assumed by the buyer.

Advantages of Shipping terms

Shipping terms provide clarity and security in the process of goods delivery, thus ensuring smoothness and efficiency of the entire process. Advantages of using shipping terms include:

• Reasonable division of tasks, duties and costs between the two parties - seller and receiver. Shipping terms define which party is responsible for making custom clearance, providing insurance coverage, choosing the carrier or dealing with loading and offloading process. This guarantees that both parties comply with their obligations, therefore eliminating potential misunderstandings.
• Assigning of responsibilities and liabilities. Shipping terms clearly describe the parties’ rights and liabilities in case of any damage or loss of the goods during the delivery process.
• Setting of expectations. By including shipping terms in the agreement, both parties know what to expect from each other and when, thus avoiding any unpleasant surprises.
• Establishing of terms of payment. Shipping terms also include the terms of payment for the goods delivery, including the payment method, the amount to be paid and the due date.

Limitations of Shipping terms

Shipping terms have some limitations that must be taken into consideration. These include:

• They cannot be used to override any laws or regulations that are applicable in the country of shipment.
• They cannot be used to change any of the contractual obligations between the parties.
• They do not cover insurance or other costs associated with the shipment of goods.
• They do not cover any liability for damages or losses that may occur during transportation of goods.
• They do not cover any customs or duties related to the shipment of goods.
• They do not guarantee the timely delivery of goods or the accuracy of the information provided about them.
• They do not provide any legal protection or recourse for the parties involved in the shipment.
• They do not provide any guarantee or warranty for the goods being shipped.

Other approaches related to Shipping terms

Besides specifying delivery conditions, shipping terms may also include other approaches:

• Risk assessment: It is important to determine the risks associated with shipping goods. This involves taking into account external factors such as weather, road conditions, and the type of goods being shipped.
• Planning and preparation: Planning and preparation are essential for ensuring that the goods are transported safely, securely, and on time. This includes selecting the most appropriate carrier, preparing the necessary documents, and making sure that the goods are properly packed and secured.
• Monitoring and tracking: Tracking and monitoring the goods during transit is important to ensure that they are delivered on time and in the condition that was expected. This includes tracking the progress of the shipment, ensuring that the goods are delivered to the correct destination, and tracking any changes in the condition of the goods.
• Insurance coverage: It is important to ensure that the goods are insured in case of any damage or loss. This may include taking out insurance cover for the goods and any associated liabilities.
• Customs clearance: Depending on the destination, it may be necessary to make customs clearance for the goods. This includes obtaining the necessary documents, submitting the required paperwork, and paying any necessary taxes or fees.

Shipping terms are an important part of ensuring that goods are delivered safely and on time. They involve risk assessment, planning and preparation, monitoring and tracking, insurance coverage, and customs clearance.

Footnotes

Shipping terms — recommended articles

Free carrier (FCA) — Bill of lading — Shipping note — Contract of affreightment — CMR convention — Ocean bill of lading — Liner terms — Waybill — Delivery terms

References

1. Lesmian-Kordas R. (2011),Transport susceptibility of cargoes as their classification criterion,, "Scientific Journals Maritime University of Szczecin", 26(98).
2. Malifliet J. (2011), Incoterms 2010 and the mode of transport: how to choose the right term, Univerisiteit Gent Academic Bibliography, Gent.
3. Ramberg J. (2011), ICC Guide to Incoterms 2010 Understanding and practical use ICC Services Publications, Paris.
4. Ramberg J. (2011), Incoterms 2010 "Penn State International Law Review", 3.

Author: Sylwia Zych