Incoterms 2010 Freight and Associated Charges

 A fundamental aspect of any sale of goods transaction is costing the product accurately. This equally applies to both the seller and the buyer. In this three part series, I will be discussing the responsibilities of the seller and buyer in relation to freight and associated charges in accordance with the Incoterms® 2010.

In this first part, I will provide a "ready-reckoner" chart that outlines who is responsible for the delivery charges. In part two, I will be making reference to the possible variations in usage and practice, and in part three, I will be suggesting some best practices that sellers and buyers may wish to consider implementing to ensure their relative risk position is managed to the best degree possible.

Incoterms 2010 are issued by the International Chamber of Commerce and became effective 1 January 2011. It should be noted that although these international trade terms may be applied to domestic transactions, the focus in this series of articles is limited to international trade situations. Incoterms are a voluntary set of rules requiring specific incorporation into the contract of sale for these rules to apply. The rules define the seller's and buyer's responsibilities for the delivery of goods and the associated risks and costs on a mutually exclusive basis.

The responsibility for the payment of freight charges is clearly outlined in the text of the Incoterms 2010 rules. The table below summarises the position of sellers and buyers in this respect across all of the rules.

If we look closely at Table 1, we can observe some patterns. The buyer is responsible for freight under E terms (EXW) and F terms (FCA, FAS, and FOB). The seller is responsible for freight under C terms (CPT, CIP, CFR and CIF) and D terms (DAT, DAP and DDP).

It stands to reason, therefore, that the seller is only obliged to enter into a contract of carriage where they are responsible for the payment of freight charges (C and D terms), and where they are not, the buyer is responsible for contracting for carriage (E and F terms).

Whilst this position is clear for E, C and D terms, it is not so clear for F terms, particularly FCA and FOB. This is because the buyer may request that the seller procure a transport document for them. Whilst there is no obligation for the seller to do so, the Incoterms 2010 rules acknowledge that sellers may wish to meet the demand of buyers and that in certain industrial sectors this is common practice. Although the procurement of a transport document is to be done at the buyer's risk and expense, in practice this may be more complex than first imagined, in the context of cost recovery. The situation is certainly less clear with FCA than FOB.

I will be discussing these issues in the second article of this series.