What is the Delivery Term?

Importance of Delivery Terms

Delivery terms play a vital role in international trade by:

1. Defining responsibilities: They clearly outline the obligations of both the buyer and seller, such as who arranges for transportation, who pays for shipping costs, and who bears the risk of loss or damage to the goods during transit.

2. Determining costs: Delivery terms specify which party is responsible for paying various costs associated with shipping, such as transportation, insurance, customs duties, and taxes.

3. Establishing risk transfer: They determine the point at which the risk of loss or damage to the goods transfers from the seller to the buyer.

4. Facilitating communication: By using standardized delivery terms, buyers and sellers from different countries can communicate effectively and avoid misunderstandings.

Incoterms

Incoterms, short for International Commercial Terms, are a set of predefined commercial terms published by the International Chamber of Commerce (ICC). They are widely used in international trade to clearly communicate the tasks, costs, and risks associated with the transportation and delivery of goods.

History of Incoterms

The ICC first introduced Incoterms in 1936 to establish a standard set of trade terms that could be used globally. Since then, Incoterms have been revised several times to keep pace with changes in international trade practices. The most recent version, Incoterms 2020, came into effect on January 1, 2020.

Incoterms 2020

Incoterms 2020 consists of 11 terms, each represented by a three-letter acronym. These terms are divided into two categories based on the mode of transport:

Rules for Any Mode of Transport

1. EXW (Ex Works)
2. FCA (Free Carrier)
3. CPT (Carriage Paid To)
4. CIP (Carriage and Insurance Paid To)
5. DAP (Delivered at Place)
6. DPU (Delivered at Place Unloaded)
7. DDP (Delivered Duty Paid)

Rules for Sea and Inland Waterway Transport

1. FAS (Free Alongside Ship)
2. FOB (Free on Board)
3. CFR (Cost and Freight)
4. CIF (Cost, Insurance, and Freight)

Here’s a table summarizing the Incoterms 2020:

Choosing the Right Incoterm

When selecting an Incoterm for a transaction, consider the following factors:

1. Mode of transport: Determine whether the goods will be transported by sea, air, road, rail, or a combination of these methods.

2. Level of responsibility: Decide how much responsibility and risk each party is willing to take on.

3. Cost allocation: Consider which party is better positioned to arrange and pay for transportation, insurance, and other costs.

4. Customs clearance: Determine which party will be responsible for clearing the goods through customs and paying any necessary duties and taxes.

It’s essential for both parties to agree on the appropriate Incoterm and clearly specify it in their sales contract to avoid misunderstandings and disputes.

Other Delivery Terms

While Incoterms are the most widely used delivery terms in international trade, there are other terms that may be used in specific situations or regions.

Revised American Foreign Trade Definitions (RAFTD)

RAFTD is a set of trade terms used primarily in the United States for domestic trade. These terms were last updated in 1941 and are not as commonly used as Incoterms.

Uniform Commercial Code (UCC)

The UCC is a set of laws governing commercial transactions in the United States. It includes a section on delivery terms, which are similar to but not identical to Incoterms.

Combiterms

Combiterms are a set of trade terms developed by the Baltic and International Maritime Council (BIMCO) for use in the chartering of ships. They are not as comprehensive as Incoterms and are primarily used in the shipping industry.

Delivery Terms and International Trade Documentation

Delivery terms are closely related to the various documents used in international trade. Some of the key documents include:

1. Commercial invoice: A document issued by the seller to the buyer, detailing the goods sold, their price, and the terms of sale.

2. Bill of lading: A legal document issued by a carrier to a shipper, acknowledging receipt of goods for transportation and specifying the terms of delivery.

3. Certificate of origin: A document certifying the country in which the goods were produced or manufactured.

4. Insurance certificate: A document providing evidence of insurance coverage for the goods during transit.

5. Packing list: A document detailing the contents of each package or container in a shipment.

The specific documents required for a transaction will depend on the delivery term used, as well as the requirements of the countries involved and the mode of transport.

Impact of Delivery Terms on Business

The choice of delivery term can have a significant impact on a company’s business operations and financial performance. Some of the key considerations include:

1. Cash flow: The party responsible for paying transportation and other costs will need to factor these expenses into their cash flow planning.

2. Risk management: The point at which risk transfers from the seller to the buyer can affect a company’s exposure to potential losses or damages.

3. Pricing: The choice of delivery term can influence the price of goods, as the seller may need to adjust prices to account for additional costs or responsibilities.

4. Supply chain efficiency: Clearly defined responsibilities and effective communication between parties can help streamline supply chain operations and reduce delays or disruptions.

Companies should carefully consider their options and choose delivery terms that align with their business objectives, risk tolerance, and operational capabilities.

Frequently Asked Questions (FAQ)

1. What happens if the buyer and seller disagree on the interpretation of a delivery term?
   If there is a disagreement on the interpretation of a delivery term, the parties should first try to resolve the issue through negotiation. If a resolution cannot be reached, they may need to seek legal advice or pursue dispute resolution through arbitration or litigation, depending on the terms of their contract.

2. Can parties use a combination of Incoterms in a single transaction?
   It is generally not recommended to use a combination of Incoterms in a single transaction, as this can lead to confusion and misunderstandings. Parties should agree on a single Incoterm that best suits their needs and clearly specify it in their sales contract.

3. How have Incoterms evolved over time?
   Incoterms have been updated several times since their introduction in 1936 to reflect changes in international trade practices and transportation methods. The most recent version, Incoterms 2020, includes changes such as the replacement of DAT (Delivered at Terminal) with DPU (Delivered at Place Unloaded) and updates to insurance coverage requirements for CIP (Carriage and Insurance Paid To).

4. Are Incoterms legally binding?
   Incoterms themselves are not legally binding. However, when incorporated into a sales contract, they become a legally binding part of that contract. It is important for parties to ensure that their contract clearly specifies the chosen Incoterm and any additional terms or conditions.

5. What role do delivery terms play in customs clearance?
   Delivery terms specify which party is responsible for clearing the goods through customs and paying any necessary duties and taxes. This information is important for customs authorities to determine the appropriate tariff classification and assess applicable duties and taxes. The chosen delivery term can also impact the documentation required for customs clearance, such as commercial invoices and certificates of origin.

Conclusion

Delivery terms are a critical component of international trade, providing a common language for buyers and sellers to define their responsibilities, costs, and risks associated with the transportation and delivery of goods. By understanding and effectively using delivery terms, particularly Incoterms, companies can improve communication, reduce misunderstandings, and streamline their supply chain operations.

As global trade continues to evolve, it is essential for businesses to stay informed about changes to delivery terms and best practices in international trade. By working closely with their trading partners, logistics providers, and legal advisors, companies can navigate the complexities of international trade and build successful, long-term business relationships.