Chapter 4 Trade Terms

4.1 The Role of Trade Terms

Trade Terms are also called price terms or delivery terms. A trade term is a combination of letters or words, which specifies certain obligation within international trade contract. For example, FOB or FREE ON BOARD. A trade term embraces three basic elements:1）Transfer of risks. A trade term specifies when the risks of loss of or damage to goods are transferred from the seller to the buyer; 2）Transfer of obligations. A trade term specifies where and how the buyer must take delivery of the goods;3）Division of costs. A trade term specifies how the normal costs relating to the export and import of goods should be divided between the seller and the buyer.

4.2 International Trade Usages About Trade Terms

4.2.1 Warsaw-Oxford Rules 1932

In 1928, the International Law Association held a meeting in Warsaw, and worked out the Uniform Rules for CIF Sales Contracts, which was called Warsaw Rules 1928, and renamed Warsaw-Oxford Rules 1932 at the Oxford Convention and includes 21 clauses. It is mainly used to indicate the nature and characteristic of the CIF contact and also to stipulate the responsibilities of the two parties under CIF terms.

4.2.2 Revised American Foreign Trade Definition 1990

In 1919, nine American commercial groups drew up The U.S. Export Quotation and Abbreviations, then revised in 1941,1990 and renamed Revised American Foreign Trade Defini tion 1990. It was adopted by the American Chamber of Commerce, the National Importers Association and the American Foreign Trade Association in 1990. It defines six trade terms, i.e. Ex-point of origin, FOB, FAS, C&F, CIF and Ex-dock. Except Ex-point of origin and Exdock, the other four trade terms are explained quite differently from those in INCOTERMS. These trade terms are often adopted in the United States of America, Canada and some other countries in America.

4.2.3 International Commercial Terms（Incoterms）

Trade terms have been developed in practice for many years. However, parties to a contract are frequently unaware of the different trading practices in their respective countries. This can give rise to misunderstandings, disputes and litigation with all the waste of time and money that this entails. In order to remedy these problems, the International Chamber of Commerce first published in 1936 a set of trade terms. These rules were known as INCOTERMS 1936. Amendments and additions were later made in 1953, 1967, 1976, 1980, 1990, 2000, 2010 and 2020 in order to bring the rules in line with current international trade practices. The latest version INCOTERMS 2020 came into force on Jan.1,2020. It must be borne in mind that INCOTERMS are widely used in international trade practices.

4.3 Incoterms 2020 Categories

The Incoterms 2020 are organized into two categories: Incoterms for any mode of transport （EXW, FCA, CPT, CIP, DAP, DPU, DDP）, Incoterms for sea and inland waterway transport only（FAS, FOB, CFR, CIF）.

4.4 Major Trade Terms in Incoterms 2020

Among the eleven trade terms, FOB, CFR and CIF are the most commonly used terms;other three trade terms, FCA, CPT and CIP are also commonly used terms. Listed below is an interpretation of the six major trade terms.

4.4.1 FOB

4.4.1.1 Implication of FOB

The term FOB means that the seller delivers the goods on board the vessel nominated by the buyer at the named port of shipment or procures the goods already so delivered. The risk of loss of or damage to the goods passes when the goods are on board the vessel, and the buyer bears all costs from that moment onwards. The seller is also required to clear the goods for export, where applicable. However, the seller has no obligation to clear the goods for import, pay any import duty or carry out any import customs formalities.

FOB may not be appropriate where goods are handed over to the carrier before they are on board the vessel, for example goods in containers, which are typically delivered at a terminal. In such situations, the FCA term should be used. The FOB term, as its name suggests, is a maritime trade term and is used only for sea or inland waterway transport.

4.4.1.2 Variants of FOB

The variants of FOB are used to specify the division of loading cost. The commonly used variants of FOB are:

（1）FOB Liner Terms

Such cost of loading is normally covered by the freight when the goods are carried by regular shipping lines. Thus under this FOB variation, the cost of loading is for the account of the buyer who contracts for carriage and bears the freight.

（2）FOB Under Tackle

This term only requires the seller to bear the cost of sending and placing the goods on the wharf within the reach of the ship's tackle. Loading cost incurred thereafter is borne by the buyer.

（3）FOB Stowed（FOBS）

The word“stow”means the act of putting cargo tidily in the hold. This term requires the seller to assure the loading cost of loading including stowing cost.

（4）FOB Trimmed（FOBT）

When we say trim a vessel, it means we level the bulk cargo so that the vessel can sail smoothly and safely. Under this term, the seller bears the loading cost including trimming cost.

（5）FOBST

This term requires the seller to bear the loading cost including both stowing and trimming cost.

The parties should clarify whether the variant only mean the loading cost the relevant party should bear or both of the cost and risks.

4.4.2 CFR

4.4.2.1 Implication of CFR

The term CFR means that the seller delivers the goods on board the vessel or procures the goods already so delivered. The risk of loss of or damage to the goods passes when the goods are on board the vessel. The seller must contract for and pay the costs and freight necessary to bring the goods to the named port of destination. If the shipment is containerized or to be containerized, common practice is to deliver the shipment to the carrier at a terminal and not on board a ship. In such situations, the CPT term is recommended.

4.4.2.2 Variants of CFR

The variant of CFR is used to specify the division of unloading cost.

（1）CFR ex Ship's Hold

The seller fulfills his obligations when he has made the goods available to the buyer for unloading. The buyer pays the cost for discharging the goods from the ship's hold.

（2）CFR Landed

This term requires the goods must be unloaded onto the dock. The seller is responsible for discharge of the goods and pays the cost, including lighterage and wharfage charges.

（3）CFR ex Tackle

This term requires the seller to bear the unloading cost including barging and dockage charges.

（4）CFR Liner Terms

Since such cost of unloading is normally covered by the freight when the goods are carried by regular shipping lines, this variation means that the cost of unloading is for the account of the seller who contracts for carriage and bears the freight.

The parties should clarify whether the variant only mean the unloading cost the relevant party should bear or both of the cost and risks.

4.4.2.3 Shipping Advice under CFR

Whatever terms are used, the seller is obliged to send shipping advice to the buyer to inform it or its agent to prepare for taking delivery of goods. However, under CFR, this is particularly important. As under CFR, the buyer must take risks for a period of carriage during which the buyer has no means of controlling or limiting those risks. The carrier used, the costs incurred for carriage and the timing of the carriage are all under the seller's control. The shipping advice sent plays an important role, which is to inform the buyer to take out insurance promptly. If, however, the seller fails to do this, he will have to bear the risks of loss or damage to the goods incurred in transit.

4.4.3 CIF

4.4.3.1 Implication of CIF

CIF term means that the seller clears the goods for export and delivers them on board the vessel at the port of shipment, or procures the goods already so delivered. The risk of loss of or damage to the goods passes when the goods are on board the vessel. The seller must contract for and pay the costs and freight necessary to bring the goods to the named port of destination. If the shipment is containerized or to be containerized, common practice is to deliver the shipment to the carrier at a terminal and not on board a ship. In such situations, the CIP term is recommended.

4.4.3.2 Variants of CIF

The variant of CFR is used to specify the division of unloading cost, and variants of CIF is the same as variants of CFR.

4.4.3.3 Insurance Coverage

As explained by Incoterms 2020, the seller acts for the buyer to cover insurance under CIF term. There is no stipulation on the contract, the lowest level of insurance could be covered, however, a higher level may be covered at the buyer's requirement.

4.4.3.4 Symbolic Delivery

CIF is a typical term for symbolic delivery, in comparison with physical delivery, Symbolic Delivery refers to that the seller fulfills obligation on condition that the seller ships the goods on board the vessel as the contract stipulates at port of shipment within due time and delivers related entitled documents as stipulated on the contract. The risks are transferred when the goods are on board the vessel. The seller is liable for loading the goods in due time and has no guarantee for the arrival of goods. The core of symbolic delivery is the buying and selling of related documents instead of physical goods, in other words, delivering the documents is delivering goods by the seller to the buyer. The seller delivers the goods against documents and the buyer pays for the goods against the documents. As long as the seller provides all sets of qualified documents in due time and even if the goods are damaged or lost during shipment, the buyer shall pay. Reversely, if the seller provides wrong documents and even if the goods are in good shape, the buyer may refuse to pay. So, CIF term is a sale of the documents. In practice, the seller delivery goods according to the documents, while the buyer pays according to the documents.

4.4.4 FCA

The term FCA means the seller delivers the goods to carrier or another person nominated by the buyer at the seller's premises or another named place. A carrier is the party with whom carriage is contracted. The parties are well advised to specify as clearly as possible the point within the named place of delivery, as the risk passes to the buyer at that point. FCA is used for any modes of transport or more than one mode of transport.

4.4.5 CPT

CPT means that the seller delivers the goods to the carrier or another person nominated by the seller at an agreed place（If any such place is agreed between the parties）and that the seller must contract for and pay the costs of carriage necessary to bring the goods to the named place of destination. This means that the buyer bears all risks and any other costs occurring after the goods have been so delivered. CPT may be used for airfreight, road-freight, rail-freight, sea-freight or a combination of such modes. If subsequent carriers are used for the carriage to the agreed destination, the risk passes when the goods have been delivered to the first carrier.

4.4.6 CIP

4.4.6.1 Implication of CIP

CIP means that the seller delivers the goods to the carrier or another person nominated by the seller at an agreed place（If any such place is agreed between the parties）and that the seller must contract for and pay the costs of carriage necessary to bring the goods to the named place of destination. CIP is used for any modes of transport or more than one mode of transport.

4.4.6.2 Insurance Coverage

Under CIF term, the seller must obtain insurance cover complying with ICC（A）or similar clause（e.g. All Risks）against the buyer's risk of loss of or damage to the goods during the carriage. The insurance shall cover the price provided in the contract plus ten percent（i.e. 110%）. Although, of course, it is allowed to open to the parties to agree on a lower level of cover（e.g. FPA）.

4.5 Other Trade Terms in Incoterms 2020

4.5.1 EXW

EXW term means the seller delivers when he places the goods at the disposal of the buyer at the seller's premises or another named place（e. g. works, factory, warehouse, etc.）not cleared for export and not loaded on any collecting vehicle. The seller's obligations cease when the buyer accepts the goods at the factory or warehouse. This trade term places the greatest responsibility on the buyer and minimum obligations on the seller. EXW is used for any modes of transport or more than one mode of transport.

4.5.2 FAS

FAS term means that the seller delivers when the goods are placed alongside the vessel（e.g. on a quay or a barge）nominated by the buyer at the named port of shipment. The risk of loss of or damage to the goods passes when the goods are alongside the ship, and the buyer bears all costs from that moment onwards. FAS term is to be used only for sea or inland waterway transport.

4.5.3 DAP

DAP term means that the seller delivers when the goods are placed at the disposal of the buyer on the arriving means of transport ready for unloading at the named place of destination. The seller bears all risks involved in bringing the goods to the named place. DAP is used for any modes of transport or more than one mode of transport.

4.5.4 DPU

DPU term means that the seller delivers when the goods, once unloaded from the arriving means of transport, are placed at the disposal of the buyer at a named terminal at the named port or place of destination. The seller bears all risks involved in bringing the goods to and unloading them at the terminal at the named port or place of destination. DPU is used for any modes of transport or more than one mode of transport.

4.5.5 DDP

DDP term means that the seller delivers when the goods are placed at the disposal of the buyer, cleared for import on the arriving means of transport ready for unloading at the named place of destination. The seller bears all the costs and risks involved in bringing the goods to the place of destination. DDP term represents the maximum obligation for the seller and the minimum obligation on the buyer. DDP is used for any modes of transport or more than one mode of transport.