The transport of goods in domestic, and especially international traffic, is accompanied with great risk. Although, in general, the traffic is much safer today, during transport the goods can still be accidentally lost or damaged for reasons that neither buyer nor seller can control. This, in turn, raises the question of responsibility. Clearly, it is in the seller’s interest for the buyer to pay the price without asking for new goods to be delivered, and in the buyer’s interest not to pay the price again if the goods are lost.
Given that negotiating the exact moment when the risk of loss and damage to the goods is transferred from the seller to the buyer is often a tedious task, it is recommended that the contracting parties agree on a transport clause.
To put it simply, transport clauses regulate in detail the manner of transferring risks and costs from the seller to the buyer, and it is sufficient for the sale and purchase agreement on the transported goods to contain the name of the clause, as well as the edition of clauses. In the event of a dispute, the court will be able to thereby clearly determine who should bear the risk in the event of loss of goods, i.e. the cost of their transportation.
The most popular edition of transport clauses are Incoterms – International Commercial Clauses adopted by the International Chamber of Commerce – ICC Paris, which are still in force today in the modified version Incoterms 2020. Incoterms clauses do not represent a complete sale and purchase agreement, but only a part of it. The following structure should be used for them to apply: “(selected Incoterms clause), (specified port, place or point), Incoterms 2020”.
If the Incoterms clause does not specify a year, the following applies:
- until 31 December 2019, the Incoterms rules 2010 apply,
- from 1 January 2020, the Incoterms rules 2020 apply.
Most often, traders insist on these clauses being contracted in international transport, but their application in domestic traffic is not excluded either.
Incoterms clauses in any mode of transport
Below we will briefly explain the implication of individual clauses, that can be used in line with specific needs, in any mode of transport:
- EXW – Ex Work (designated place of the seller)
When contracted, this clause indicates the warehouse, facility, or factory of the seller, from which the buyer should take over the goods. It is convenient to contract this clause when the buyer wants to buy the goods as cheaply as possible and can organize the transport independently. This means that as soon as the seller puts the goods at the disposal of the buyer in the warehouse and invites him to take over the goods, all the risk of accidental ruin and further costs are borne by the buyer. It is most convenient for the buyer in this case to hire a carrier or freight forwarder to transport the goods. The seller bears minimal risk, but the price of the goods is also the lowest.
- FCA – Free Carrier (designated place)
There are no major differences compared to the previous clause, but it should be noted that the seller delivers the goods, which are cleared through customs, to the agreed place. The goods may be delivered to the carrier appointed by the buyer, or to another person also appointed by the buyer. It is convenient to contract this clause when it is in the buyer’s interest for the goods to be delivered to, say, a certain port, when the buyer has already agreed on the transport of goods by sea or inland waterway. The seller bears the cost of transporting the goods to the designated place, and the risk of loss passes to the buyer when the means of transport carrying the goods arrives at the designated place. It is interesting that the seller has no obligation to load the goods onto the buyer’s means of transport at the designated place, unless the delivery is made on the seller’s premises, or any other location under his control. Otherwise, the obligation to load the goods is borne by the buyer.
- CPT – Carriage Paid To (designated place)
This clause is very interesting for sellers who are interested in negotiating a higher price for the goods, because they have the means to transport them cheaper to the designated place, but they do not want to bear the risk of accidental loss of goods during transport. Therefore, in this clause, the costs of transporting the goods to the designated place are borne by the seller, but the buyer must accept the risk of loss of goods when the seller hands over the goods to the first carrier hired by the buyer, to whom the buyer paid the transportation costs.
- CIP – Carriage and Insurance Paid To (designated place)
This clause corresponds in all respects to the previous clause, except for the obligation to obtain insurance for goods in transport. In addition to having to pay for transportation to the designated place, the seller also has the obligation to obtain insurance for the goods, i.e. to pay a premium, and in case the goods are lost or damaged during transportation, the buyer will be entitled to insurance compensation.
- DAP – Delivered at Place (designated place)
This clause belongs to the group of clauses where the seller now bears higher risk and costs, but, at the same time, the goods are, consequently, more expensive. It is suitable for sellers who have a cheaper but safer way of contracting transportation with a carrier or freight forwarder, on the basis of which they can save their own costs and thus increase profit, and also for importing buyers who do not want to deal with transport at all and are ready to pay a higher price for the goods, but not to bear the risk of a loss of goods in transport or the obligation to hire a carrier or freight forwarder themselves. Under this clause, the seller must deliver the goods to the designated place. He bears all the costs of transport, as well as export duties, which means that the seller must obtain export customs licenses, as is also the case with the previous clauses. The risk of damage to the goods passes to the buyer when the goods are ready for unloading from the seller’s vehicle at the designated place. The obligation to unload the goods and obtain import customs permits is on the buyer.
- DPU – Delivered at Place Unloaded (designated place)
This clause fully corresponds to the content of the previous clause, except that the obligation to unload the goods is on the seller. So, if the buyer does not want to bear the risk of damaging the goods during unloading, it is convenient to negotiate this clause, which means that if, say, persons unloading the goods damage it, the seller will be obliged to provide the buyer with new quantities of the same type of goods at his own expense. If the previous clause had been agreed, the buyer would have been forced to accept the damaged goods and pay the price for them, because he bears the risk of damage during unloading.
- DDP – Delivered Duty Paid (designated place)
Contrary to the first clause EXW where the least risk and cost is borne by the seller, but the goods are the cheapest, in this clause the entire risk and cost of transport and customs clearance of goods is borne by the seller, but therefore the goods are most expensive. It is suitable when the seller is fully capable of organizing transportation and customs clearance of goods, and the buyer does not want to deal with it at all. If, for example, you are an importing buyer, and you have an interest in obtaining goods from a foreign market, but you do not have a way to organize transport, this is an ideal clause. The seller is responsible for the delivery of the goods to the designated place in the buyer’s country and pays all costs of importing the goods including import duties and taxes. The seller is not responsible for unloading. This clause sets a maximum liability on the seller and a minimum liability on the buyer. No risk and responsibility are transferred to the buyer until the goods are delivered to the designated destination.
Incoterms clauses that can only be used in maritime transport and inland navigation
In addition to the mentioned clauses, which can be used when goods are transported by any means of transport, Incoterms also regulate the special clauses for transport by sea and inland waters:
- FAS – Free Alongside Ship (designated vessel i.e. port)
This clause means that the seller completes the delivery to the buyer when the goods are placed next to the vessel (e.g. on a quay or barge) designated by the buyer at the port of delivery. The risk of loss or damage to the goods is transferred when the goods are found next to the vessel and the buyer bears all costs from that moment onwards. This means that the risk of loss or damage to the goods when boarding the ship is borne by the buyer.
- FOB – Free on Board (designated vessel)
This clause implies that the seller delivers the goods to the vessel designated by the buyer. The seller shall bear all costs and risks related to the goods until the moment the goods touch the deck of the ship. Therefore, contrary to the previous clause, the risk of loss or damage of the goods during boarding is borne by the seller. If, for example, the goods are lost or damaged during boarding, the seller must replace the goods, and will not have the right to charge the price again.
- CFR – Costs and Freight (designated place)
This clause implies that the seller must deliver the goods when they are loaded on the vessel, however, in addition to the previous clause, the costs related to the goods must be borne until they arrive at the port of destination. The seller is not responsible for the loss or damage of the goods while they are sailing, because the risk passes to the buyer as soon as the goods are loaded on the ship. Although the seller bears the cost of transport, this clause is not suitable for buyers when the goods are transported over long distances, for example, overseas, when the risk of damage is much higher.
- CIF Costs, Insurance and Freight (designated place)
This clause is similar in content to the previous one, except for a significant difference which is favorable to the buyer of the goods. Namely, although the buyer bears the risk of loss or damage to the goods, the seller must insure the goods at his own expense during transport from the risk of loss or damage, for the account of the buyer, or for the account of whom it concerns. This means that the buyer is insured and if the goods are damaged or lost, he will be able to collect insurance compensation. This also applies to the buyer’s buyer because the goods are insured for the account of the person who bears the risk.
Transport clauses make it much easier for contracting parties to regulate the moment of transferring the risks and costs. This is extremely important since it is very common for goods to get lost or damaged during transport. Disputes almost always arise on this occasion, entailing costs for both the buyer and the seller. By contracting Incoterms clauses, the contracting parties avoid uncertainty, because it is known at all times who bears the risk and cost.
To ensure the application of Incoterms clauses, it is necessary for them to be explicitly agreed. Certainly, contracting an individual clause requires knowledge and expertise on this matter, and if both the buyer and the seller agree, it is desirable to hire experts who can help them choose the appropriate clause, in accordance with their wishes, business needs and possibilities.