Incoterms & trade contracts
Arbitration (international commercial arbitration)
Resolution of a dispute by arbitrators chosen by the parties instead of state courts, in a confidential and final procedure. Institutions such as ICC, LCIA, SIAC or ISTAC, or the rules of commodity associations (GAFTA, FOSFA, LME), are commonly used. Thanks to the New York Convention, awards can be recognised and enforced in more than 170 countries, which usually makes arbitration more effective than litigation between parties in different countries. The clause should name the institution, seat, language and number of arbitrators.
Carriage and Insurance Paid To CIP
A term for any mode of transport that adds, to CPT, transit insurance bought by the seller in the buyer’s favour. Incoterms 2020 raised the minimum cover under CIP to Institute Cargo Clauses (A) – “all risks” – whereas CIF stays at (C); the insured amount is 110 % of the contract value. Risk passes when the goods are handed to the first carrier.
Carriage Paid To CPT
The multimodal counterpart of CFR, usable with any mode of transport. The seller contracts and pays carriage to the named destination, but risk passes to the buyer as soon as the goods are handed to the first carrier. Because the point where costs transfer differs from the point where risk transfers, the buyer should insure the transit. Common for road, rail, air and container shipments.
Cost and Freight CFR
Used only for sea and inland-waterway transport. The seller loads the goods on board at the port of shipment and pays freight to the named destination port, but risk passes to the buyer when the goods are on board at loading, exactly as under FOB. The buyer therefore carries the transit risk and should arrange its own cargo insurance. Prices are quoted with the destination port, e.g. “CFR Iskenderun”.
Cost, Insurance and Freight CIF
A sea-transport term that adds, to CFR, cargo insurance taken out by the seller in the buyer’s favour. Under Incoterms 2020 the minimum cover for CIF is Institute Cargo Clauses (C) for 110 % of the contract value; if broader “all risks” (A) cover is wanted it must be written into the contract. Risk still passes when the goods are loaded on board at the port of shipment, so the seller pays freight and insurance but does not carry the voyage risk.
Delivered at Place DAP
The seller places the goods at the buyer’s disposal on the arriving means of transport, ready for unloading, at the named destination, bearing all costs and risks up to that point. Unloading, import clearance, duties and VAT are for the buyer. Widely used for delivered truck sales; the contract should say who pays waiting charges if import formalities cause delays.
Delivered at Place Unloaded DPU
The only Incoterms rule that obliges the seller to unload the goods at destination; it replaced the former DAT in Incoterms 2020. The seller bears all risks and costs up to and including unloading at the named place, while import clearance and duties remain with the buyer. If the seller has no control over unloading equipment at destination, the rule is risky and DAP is usually safer.
Delivered Duty Paid DDP
The Incoterm with the greatest obligation for the seller: the goods are delivered in the buyer’s country, cleared for import with duties and import taxes paid, ready for unloading. It is hard to apply if the seller has no tax registration or authorised representative in the importing country, and costs such as non-recoverable import VAT can arise. Because of these risks, raw material trade usually prefers DAP with the buyer handling import clearance.
Ex Works EXW
The Incoterm with the least obligation for the seller: goods are made available at the seller’s factory or warehouse, not loaded on the collecting vehicle. Loading, export clearance, freight and all risks are the buyer’s. Because a foreign buyer usually cannot file the export declaration itself, FCA is often the better choice for international sales.
Force majeure
A contract clause covering events beyond the parties’ control that could not be foreseen or avoided – war, earthquake, epidemic, embargo, port closure – which temporarily or permanently prevent performance. A good clause lists the events, sets a notice period (often 7–14 days), defines the evidence required (e.g. a chamber of commerce certificate) and gives a right to terminate if the event lasts beyond a set time. Price increases or market changes are normally not force majeure.
Free Alongside Ship FAS
Used only for sea and inland-waterway transport. The seller places export-cleared goods alongside the vessel nominated by the buyer (on the quay or a barge); risk passes there, and loading onto the ship and freight are for the buyer. Common for bulk and project cargo such as grain, timber, scrap and heavy lifts; for containerised goods FCA should be used instead.
Free Carrier FCA
The seller delivers export-cleared goods to the carrier nominated by the buyer at the named place. If the place is the seller’s premises the seller loads the goods; elsewhere (e.g. a port terminal) they are delivered on the arriving vehicle ready for unloading. Suitable for any transport mode; under Incoterms 2020 the buyer can instruct its carrier to issue an on-board bill of lading to the seller, which helps with letters of credit.
Free On Board FOB
One of the most common terms in raw material trade, used only for sea and inland-waterway transport. The seller loads export-cleared goods onto the vessel nominated by the buyer at the port of shipment, and risk passes once the goods are on board. The buyer arranges freight and insurance; for bulk cargo the loading rate, laytime and demurrage must be agreed separately. For containerised goods FCA is the more accurate choice.
Incoterms 2020
The eleven standard delivery terms published by the International Chamber of Commerce (ICC) that define where the seller delivers, when risk passes to the buyer and who pays for freight, insurance and customs formalities. Incoterms do not set the price, the payment method or the transfer of ownership; those must be written separately in the contract. A rule should always be quoted with a named place and the version, e.g. “FOB Mersin Port, Incoterms 2020”.
Named place (point of delivery)
The city, port, terminal or premises written after the Incoterm abbreviation, marking where costs and risk change hands. The more precisely it is stated (e.g. “FCA Gebze, seller’s warehouse, 4 Yeni St.”), the lower the risk of dispute. Writing only a country, or no place at all, is a common mistake that leaves the transfer of risk and the split of costs unclear.
Proforma invoice PI
A preliminary invoice issued by the seller before shipment, listing the product, quantity, unit price, Incoterm, payment terms, delivery time and bank details. Buyers use it to open a letter of credit, pay an advance or apply for import licences or foreign-exchange allocation. It is not a tax invoice; once countersigned by the buyer it can serve as the contract in simple deals, but larger transactions deserve a full sales contract.
Purchase order PO
The formal order a buyer sends to a supplier stating the product, specification, quantity, price, delivery date, delivery term and payment conditions. Once the seller confirms it in writing (order confirmation), a binding contract exists between the parties. The PO number is quoted on invoices, delivery notes and shipping documents and makes reconciliation easier.
Quantity tolerance (± %, “more or less”)
A clause in bulk and large-volume contracts accepting that the delivered quantity may deviate from the contract quantity by a set percentage, usually ±5 % or ±10 %. It states whose option the deviation is: the seller’s (MOLSO) or the shipowner’s (MOLOO). Over- or under-delivery within the tolerance is normally invoiced at the contract price, and the letter of credit must carry the same tolerance – otherwise UCP 600 allows only ±5 % for bulk goods.
Sales contract
The core document setting out the parties’ rights and obligations in an international raw material sale. It should cover the product and specification, quantity and tolerance, price and currency, Incoterm and named place, shipment period, payment method, quality and quantity determination (inspection), insurance, force majeure, remedies for breach, governing law and dispute resolution. Where the parties’ countries allow it, the UN Convention on Contracts for the International Sale of Goods (CISG) applies unless expressly excluded.
Spot purchase vs. term contract
A spot purchase is a one-off deal at the current market price for prompt delivery: flexible, but exposed to price and supply swings. A term contract secures regular shipments over a period (a quarter, a year) at a fixed or formula-linked price, giving security of supply but often with a minimum off-take (take-or-pay) obligation. Manufacturers usually balance risk by covering part of their needs on term and buying the rest spot.