Answers: Incoterms Quiz

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1. What are Incoterms 2010? Select the appropriate answer from the following:

b) A set of internationally recognised contract terms that define buyer/sellers’ responsibilities when included in international contracts;

A common misconception is that Incoterms relate to title - ownership of the goods, payment, etc have nothing to do with the Incoterms Rule chosen in the contract and these issues must be covered elsewhere in the contract.


2. What are the differences between the following terms?

a) CIP and CIF - both terms say that:

  • the seller must pay for the freight to arrival in the buyer's country,
  • risk for the international movement of goods is the buyer's not the seller's,
  • the seller must buy cargo insurance cover in the name of the buyer  BUT

CIP is applicable for movements by any modes of transport but CIF is only appropriate for "conventional" sea freight shipments.  CIF is not even appropriate for containerised sea freight

b) FOB and CFR - both terms are only appropriate for conventional sea freight shipments (not in containers), and, under both terms therisk for the international movement of goods is the buyer's not the seller's, BUT under FOB the buyer organises the transport and pays the freight while under CFR it is the seller who does this.

c) ExWorks and FCA seller’s premises - under both terms the buyer organises the transport and pays the freight from the seller's premises BUT ExWork is not considered appropriate under the 2010 set for anything but domestic deliveries as it makes the buyer responsible for all export formalities.  This includes:

  • the loading of the goods at the seller's premises
  • the preparation of export paperwork
  • being registered appropriately with the export customs authorities so the export transaction can be made in the buyer's name not the seller's
  • total transport and shipment costs, responsibilities and risks

The use of FCA seller's premises makes the seller responsible for loading, paperwork and export customs formalities which is more natural.  Changing to FCA Seller's Premises also means that the seller is legally entitled to obtain evidence of export which may be required under VAT/ Tax law.


3. You receive an export order with the Incoterm CFR New York Airport. How would you respond?

The use of CFR is not appropriate to air freight shipments as it requires the issuing of a bill of lading and for the goods to be loaded onto a ship.  The direct replacement multi-modal replacement for CFR is CPT.


4. What costs would you add to the price of the goods for an export contract going by road to Moscow, Russia from Cambridge, England under Incoterms 2010 DAP buyer’s premises Russia?

Under Delivered at Place term the seller must organise the total shipment from their premises to either the arrival point in the buyer's country or to the buyer's premises.  This questions relates to the latter situation therefore, as well as sorting out international transport, the seller must be sure they can arrange domestic delivery ... but after the buyer has cleared the goods through customs as the import customs formalities and the payment of duties and taxes are the buyer's responsibility.  The seller must be sure the buyer is able and willing to do this as any delay in clearing the goods through customs will delay the final delivery and could frustrate correct completion of the contract.  An additional concern for UK/EC companies is whether you will receive adequate evidence of export to support the VAT zero-rating of the supply - you will need to understand the ECS and EAD system.  

5. Under CIF/CIP contracts:

a) Who is legally obligated to take out the insurance cover?   The Seller

b) What value should the insurance amount cover?   110% of the cif value of the shipment, in the currency of the contract

c) Who is responsible for making the insurance claim if the goods are damaged in transit?  The Buyer


6. A customer in Nigeria asks your company to amend a quotation from CPT Lagos to DAP Lagos. What factors must be taken into consideration before accepting?

As we said under Question 4, the Delivered at Place term could mean that the seller either organises the total shipment from their premises to either the arrival point in the buyer's country or to the buyer's premises so to change the term from CPT to DAP Lagos could be a major issue.  The following should be considered;

  • Under CPT the risk of loss or damage to the goods in transit is the buyer's but under DAP it would be the seller's.  Can you arrange insurance in this case?
  • The delivery point after DAP is vague - do they mean to the arrival port/airport in Lagos or are they expecting the goods to be delivered to their own premises?  Significant risk and cost differences.
  • Will you have to adjust your selling price to cover extra costs or potential delays in transit
  • Finally, it would also be nice to know WHY they want the change.

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