Incoterms 2010 – DAP, DAT or DDP: Is it D for Dangerous? 

The essential point about D terms is that they extend the sellers delivery obligation to the country of destination unlike the other terms where, in the sense of delivery under the contract , delivery, legally takes place under the contract in the country of departure. This is why contracts using F and C terms are often referred to as ‘shipment contracts’ and those with D terms as ‘arrival contracts’

Common Pitfalls

Although the C terms are the most often misunderstood group because of the 2 critical points involving passage of risk and point to which main carriage is paid to, the D terms pose other problems to the seller, the first is matching the term to the mode of transport appropriate to the term, the second common problem is that  risk of loss or damage is borne by the seller to the named point in the destination country with the potential risk of failure to deliver under the contract if loss or damage occurs after shipment but before arrival at the agreed destination point.

The ICC guide, referred to above, recommends that sellers under D terms should …          “ carefully consider the need to protect themselves against breach of contract and non-fulfilment risks by adequate force majeure clauses or other relief clauses in the contract of sale”                                                 

A common pitfall which we will examine is the term DDP which cause difficulties for the seller in determining certain ‘in country’ costs such as Customs duties, taxes etc.

Key points and responsibilities under D group Incoterms ® rules

The seller is responsible for the arrival of the goods at a named place at the border or within the country of import or destination. Only under DDP (Delivered Duty Paid ) is the seller responsible for the import clearance tasks and costs. The carriage costs and other charges involved in the transportation to this point fall to the sellers account.

The seller is responsible for loss or damage to the goods up to the named point.

In choosing between the 3 D terms the following factors need to be considered:

The mode of transport

The distribution of costs and risks involved in discharging the goods at destination

The distribution of functions in connection with the import clearance

It is always important within the Incoterms ® system to be exact about the place named in the term but never more so than within the D Group, just to name a city as in DAP Sydney, Australia is vague and is an argument waiting to happen : DAP Sydney Airport for example is much clearer.

Real life example: A UK exporter agreed to supply machinery to Indonesia under the term DAP Jakarta (Incoterms ® 2010).  The exporter was careful to negotiate and pay the main freight costs but did not review his provisions for loss or damage. The goods were damaged in transit and the exporter was distressed to find that his insurance arrangements did not cover this type of claim.

Essential differences between the D terms

As with the other groups the essential characteristics of the D terms will remain constant in all five, namely the responsibility of the seller to pay to bring the goods to the destination point named and furthermore to accept risk of loss or damage to that named point.

Group D:  - Arrival Term

Under each D term the seller must deliver the goods to the named point in the buyer’s country and bear all risk of loss or damage until the goods have safely arrived at that named point.   It is difficult to generalise for this group of terms.  The place where delivery is legally made, where risk of loss or damage becomes the buyer’s responsibility is different for each term; reference to the International Chamber of Commerce books on the Incoterms ® rules is recommended. 

There were five “D” terms under the Incoterms ® 2000 rules – see below.  The terms are:

  • Delivered at Frontier (DAF) name the frontier, usually used for rail or road shipments, naming the frontier point is essential.  Not a 2010 term;
  • Delivered Ex-Ship (DES) named port of import, this should only be used if the goods are being moved by conventional seafreight, risk is the sellers until the goods arrive. Not a 2010 term;
  • Delivered Ex-Quay (DEQ) named point of import, only for goods being moved by conventional seafreight.  The difference between this and DES is that the seller is responsible for the off-loading of the goods and delivery to the Quay.  The buyer is responsible for all import customs clearance formalities plus import duties and taxes. Not a 2010 term.
  • Delivered Duties Unpaid (DDU) named point of arrival, can be used for any mode of transport.  The named point can either be the port or airport of arrival or the buyer’s premises.  The main difference between buying under DDU and CFR is that loss or damage is the seller’s risk until the goods have arrived at the named point.  All charges are paid by the seller up to the named point except import duties or taxes.  Replaced in the 2010 set of terms;
  • Delivered Duties Paid (DDP) named point of arrival, can be used for any mode of transport.  As under DDU, the named point can either be the port or airport of arrival or the buyer’s premises, it differs in that all UK duties and taxes should be paid by the seller.  The buyer has very few responsibilities – see below for more details.

There are three “D” terms under the Incoterms ® 2010 rules – see below.  The terms are:

Delivered at Terminal (DAT), to be used for containerised freight whether moved by road, rail or sea freight.  Seller is responsible for all costs and risk until the goods have arrived at the Terminal named.  Buyer is responsible for customs clearance costs and the payment of duties and taxes

Delivered at Place (DAP), which has replaced the 2000 term Delivered this is a new omni-module term which can also be used for domestic shipments including EU movements.  It makes the seller responsible for all costs and risk to the place named – and the place named must be in the buyer’s country.  Although it gives the option to name the buyer’s premises it must be noted that the costs of customs clearance and the payment of duties and taxes remain the buyer’s and should not be undertaken by the seller.

Key points :  Any mode of transport  …. Main freight paid by seller … risk of loss or damage is borne by the seller to the named point … Seller is responsible for export clearance  … buyer is responsible for import clearance  … buyer is responsible for off loading at the named point   . seller must provide the documentation necessary for the buyer to take delivery  .. Duty includes all import duties and taxes … buyer is responsible for any costs incurred by his failure to arrange customs clearance in time.

Real life situation

A London based seller in the U.K. supplies to an American buyer under the term DAP Chicago. The U.S customer billed the seller for internal transportation to his site on the outskirts of Chicago which because of Teamsters union rates cost the UK exporter dearly. Despite protestations it was held that DAP Chicago was not specific enough for the UK exporter to reject the charges.

Delivered Duties Paid (DDP) named point of arrival, another omni-module term which does not apply to domestic (or intra-EC movements).  The named point can either be the port or airport of arrival or the buyer’s premises, it differs from DAT and DAP above in that all UK duties and taxes should be paid by the seller.  The buyer has very few responsibilities.  Though this may seem attractive to buyers, it can be advisable that the buyer controls the import entry process and the payment of import taxes such as VAT as some taxes are reclaimable from the government if the company is registered.   Seller’s should be very cautious when considering this term as the calculation of overseas customs formality charges, duties and taxes can be difficult to identify and may not be stable during the life-time of the order.  Also, any delays overseas will be at the seller’s expense and risk.

Key points are the same as DAP with the important exception that the seller agrees to pay all import duties and taxes to the named point in the country of destination. Import duties and taxes include all the customs entry costs. This term is the other extreme from ExWorks in that it gives maximum responsibility to the seller.

Risk passes at the named point and unloading is the responsibility of the buyer..

Extreme care must be taken to ensure that the seller understands clearly what import charges he will incur in the country of destination.

Real life example

UK exporter is persuaded to accept an export contract for a supply to Brazil under DDP terms. Under the impression that import charges will be similar to the ones he is familiar with in the USA he goes ahead without proper research. He finds to his shock and dismay that he has incurred import costs to the tune of 60% in duty and import taxes. These unexpected costs turn his profit into considerable loss.

Conclusion:

Once you have decided on the Incoterms ® rule to use, or have been asked to quote under a specific term by your buyer, you must ensure that:

  • the price you quote covers your responsibilities under that term;
  • you understand the legal point of delivery and can deliver to that point without any problems;
  • you know what risks are your responsibility and have adequate cover, e.g. if delivering under a D-term the seller should seriously consider taking out insurance cover up to your delivery point even though it isn’t a legal obligations under the terms in this group;
  • you don’t use an Incoterms ® rule inappropriate to the type of transport used or intended to be used as this will leave you open to disputes and indeterminate costs and risk.

When trading within the EU, which is a customs-free zone, some Incoterms ® rules are relevant though the obligations for customs clearance at export or import and the payment of duties are not applicable (as long as the goods are “in free circulation”).  This has been clarified in the Incoterms ® 2010 set of terms.

 

 

Written 11th April 2013 by Sandra Strong FIEX (CITA) Managing Partner Strong & Herd LLP

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