NAME: TREVOR HAMILTON

SURNAME: PFENDE

REG NUMBER: M167731

COURSE: B.COM HONS IN LOGISTICS AND TRANSPORT

MODULE: CUSTOMS PRACTICE AND DOCUMENTATION HLT213

LECTURER: MR CHIDYA

ASSIGNMENT: Incoterms are defined as a set of international rules for

interpreting the stipulations in international sales contracts. Identify the main factors
taken into consideration when deciding which Incoterms to use. (25)
INTRODUCTION

To facilitate commerce around the world, the International Chamber of Commerce also
known as ICC publishes a set of international commercial terms which are abbreviated as
Incoterms. These are widely-used terms of sale, there are a set of 11 internationally
recognized rules which define the responsibilities of sellers and buyers. To prevent confusion
in foreign trade contracts Incoterms specify who is responsible for paying for what and
managing the shipment, insurance, documentation, customs clearance, and other logistical
activities. Parties involved in domestic and international trade often use these rules to
understand one another as well as express the exact terms of an agreement. The Incoterms
rules are updated every 10 years to conform to the ever-changing trade practices, and
adherence to the rules is voluntary. The latest update being that of 2020. There are two
categories of incoterms reflecting modes of transport. Of the 11 rules, there are seven which
apply to any mode of transportation and four others which strictly apply to transportation
across the water.

The seven Incoterm rules for any mode(s) of transport are: 

    EXW - Ex Works

The seller is only required to make the goods available for pickup at the seller’s business
premises or any other specified location. Under this incoterm, the buyer assumes all the risk
and transportation costs.

    FCA - Free Carrier

The seller is responsible for export clearance and delivery of goods to the carrier at the named
place of delivery. The Seller arranges pre-carriage from seller's depot to the named place,
which can be a terminal or transport hub, forwarder's warehouse etc. Unless otherwise
agreed upon, the seller is only responsible for loading the goods if the seller’s place of
business is the named place of delivery.

  CPT - Carriage Paid To

The seller is responsible for clearing the goods for export and delivering them to the first
carrier or another person stipulated by the seller at a named place of shipment, at which point

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risk transfers to the buyer. The seller is responsible for the transportation costs associated
with delivering goods to the named place of destination.

    CIP - Carriage and Insurance Paid To

The seller is responsible for delivering goods to the first carrier or another person stipulated
by the seller at a named place of shipment, at which point risk transfers to the buyer. The
seller is responsible for the transportation costs and insurance associated with delivering
goods at least to the named place of destination.

    DAP - Delivered at Place

The seller delivers the goods to a terminal and assumes all the risk and transportation costs
until the goods have arrived at the final destination and have been unloaded. Once offloaded
the buyer then assumes the risk and transportation costs of the goods from the terminal to the
final destination.  

    DPU - Delivered at Place Unloaded

The seller is responsible for ensuring goods arrive safely to a destination the seller is
responsible for clearing the goods for export and bears all risks and costs associated with
delivering the goods and unloading them at the named port or place of destination. The buyer
is responsible for all costs and risks from this point forward, including clearing the goods for
import at the named country of destination.

   DDP - Delivered Duty Paid

The seller assumes all the risk and transportation costs, he must clear the goods for export at
the shipping port and import at the final destination. He must pay all necessary export and
import duties for goods shipped under this incoterm.  

  

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The four Incoterm rules for Sea and Inland Waterway Transport are: 

     FAS-free alongside Ship

The seller clears goods for export and places them alongside the vessel at the named port of
departure. The named port of departure location can be a loading dock or a barge, but not a
container terminal. The buyer is responsible for loading the freight onto the vessel, as well as
handling local carriage, discharge, import formalities and duties and onward carriage to the
final destination. FAS only applies to ocean or inland waterway transport. It is popular with
bulk cargo, such as oil or grain.

 FOB - Free on Board

The seller delivers the goods on board a chosen and assigned vessel as requested and
instructed by the buyer.

     CFR - Cost and Freight

The seller is obligated to arrange sea transportation to a port of destination and provide the
buyer with the requisite necessary documentation to obtain the goods from the carrier

     CIF - Cost Insurance and Freight

The seller pays the costs, the insurance and the freight charges to protect the shipment. This is
a method of exporting goods where the seller pays all expenses until the consignment is
loaded on a vessel

THE MAIN FACTORS TAKEN INTO CONSIDERATION WHEN DECIDING

WHICH INCOTERMS TO USE.

It is important to know the Incoterms well to choose the most appropriate one depending on
whether one is buying or selling. As the interests of the seller are not the same as those of the
buyer, before deciding which Incoterm one is going to use for a certain transaction we must
take into account certain aspects. Factors such as cost of performing a transaction, transfer of
risk between the buyer and the seller, the type of transport mode to use to ferry the

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consignment, the size of the consignment and type of consignment whether it’s a dangerous
and hazourdous product, the final destination of the consignment.

Choosing the correct Incoterm prevents conflicts in case of any eventualities that may arise.
Another factor to take into account is the degree of mutual knowledge between the parties
and the trust we have with the seller if we are importers and with the buyer if we are
exporters. It is also essential to know the characteristics of the country of origin/destination
so as not to run unnecessary risks in aspects such as internal transport or customs procedures.

The choice of the most suitable Incoterm for an importer or an exporter will depend on
whether they want to control costs, contract the main transport, and reduce risks or greater
security in the logistics chain. The Incoterms DAP (Delivered at Place) and DDP (Delivered
Duty Paid) are less advisable for the exporter because they force him to take care of the
whole logistic chain and thus he,s forced to assume all the responsibility. In DAP (Delivered
at Place), you process and pay the costs of unloading the goods at the destination and
in DDP you also take care of customs formalities and inland transport in the country of
arrival. Both cases may present complications and complexities that the exporter may not be
able to control and that may generate extra costs.

For an international purchase operation, the most advantageous Incoterms for the importer

will be DAT (Delivered at Terminal), DAP (Delivered at Place) and DDP (Delivered Duty
Paid). The buyer is only responsible for customs formalities in the country of arrival, inland
transport to his premises and unloading. This is a good option if the buyer has little import
experience or does not know the country in which he is buying from. The seller will take care
of customs and logistics formalities at the origin, the transportation, insurance and unloading
at the terminal in the country of arrival.

If the importer does not have sufficient knowledge of the seller and wants to ensure that the
goods he has purchased arrive at the destination with guarantees and conditions, you can opt
for the Incoterms maritime FAS (Free Alongside Ship) and FOB (Free On Board) or
multimodal FCA (Free Carrier). The seller will leave the goods prepared and take care of the
formalities at the origin. The importer will control the costs and the logistics chain from the
point of loading until the arrival of the goods at its facilities. In this case, it is essential to

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have the support of a freight forwarder to have good control of the main transport and the
costs of the chain.

If importing by the sea the buyer wants to control the costs of the main transport, the
maritime Incoterms CFR (Cost and Freight) and CIF (Cost Insurance and Freight) are not
recommended. It is the seller who arranges the transport at origin and issues the bill of lading.
Depending on the country or the agent that the seller has contracted with, costs and other
obstacles may arise that make it difficult to deliver the goods.
The Incoterms CPT (Carriage Paid To) and CIP (Carriage and Insurance Paid To) also does
not allow the importer to control the operations and costs until the arrival of the goods at the
point of discharge in the country of destination. The Incoterm EXW (Ex Works) is not
recommended for the importer unless he knows very well both the seller and the country
where he is buying.

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