Incoterms have confused new international shippers for some time. As shrouded in mystery as the term may seem to some, it represents a very useful way of communicating and is actually meant to reduce confusion between buyers and sellers. So what exactly are Incoterms?
The International Chamber of Commerce (ICC) in Paris developed an official set of international commercial terms (Incoterms, for short) that would serve as a uniform set of rules for defining the obligations, risks, and costs associated with international transactions. The first set of Incoterms was published in 1936 and was (rather uncreatively) called Incoterms 1936. The ICC has been publishing new versions approximately every 10 years since, with the latest version, Incoterms 2010, released on January 1, 2011.
Advantages of Incoterms
As it stands today, there are 11 main terms and a number of secondary terms that help buyers and sellers communicate the provisions of a contract very clearly, therefore reducing the risk of misinterpretation by one party or another. The ICC has separated the 11 terms into two main categories: General Transport and Sea and Inland Waterway Transport.
Incoterms govern everything from transportation costs to insurance to liability and they help answer questions like:
- When will the delivery be completed?
- What are the modes and terms for carriage?
- How does a party ensure that the other party has met the standard of performance?
It’s important to remember that there are also limits on Incoterms. For example, Incoterms don’t apply to contractual rights and obligations for anything other than delivery. They also don’t define the remedies for a breach of contract.
Courts and other authorities around the world recognize these terms, which makes it easier to settle legal disputes. A lot of people are unaware of the different trade practices in other countries, so using Incoterms simplifies negotiations through one set of terms – kind of like an international language.
General Transport
Ex Works (EXW)
This is a term that defines the place of delivery. The seller simply makes the goods available at his or her place of delivery and the buyer is responsible for loading the goods and clearing them for transport. The buyer is also responsible for preparing all export documentation and getting the goods through customs. This term is often used when making an initial quotation for the sale of goods without any costs included.
- Responsibility: entirely with the buyer
- Transportation costs: entirely with the buyer
- Insurance costs: entirely with the buyer
Free Carrier (FCA)
In this situation, the seller delivers the goods, cleared for export, to whatever carrier the buyer wants to use at whatever place has been agreed upon. The agreed upon place makes a difference for the seller’s and buyer’s other responsibilities. For example, if delivery occurs at the seller’s premises, he or she is responsible for loading. If it occurs anywhere else, it is not the seller’s responsibility.
- Responsibility: mostly with the buyer
- Transportation costs: mostly with the buyer
- Insurance costs: mostly with the buyer
Carriage Paid To (CPT)
This term sets up an agreement where the seller pays for carriage and transfers the risk over to the buyer after handing the goods over to the carrier at the place of shipment. The shipper pays origin costs, including export clearance and freight costs for carriage to the named place. However, the shipper is not responsible for insurance or for delivering the goods to the buyer’s facilities.
- Responsibility: mostly with the buyer
- Transportation costs: mostly with the seller
- Insurance costs: mostly with the buyer
Carriage and Insurance Paid To (CIP)
The seller pays for carriage and insurance to the destination point, but once the goods are handed over to the first carrier risk transfers to the buyer. This Incoterm is very often used for intermodal deliveries.
- Responsibility: mostly with the buyer
- Transportation costs: mostly with the seller
- Insurance costs: mostly with the seller
Delivered at Terminal (DAT)
In this situation, the seller covers the costs of almost everything – export fees, carriage, insurance, and destination port charges. The seller is also responsible for delivering goods to the named place and loading them, although he or she does not need to clear goods for import.
- Responsibility: mostly with the seller
- Transportation costs: mostly with the seller
- Insurance costs: mostly with the seller
Delivered at Place (DAP)
This is a common term to employ when there is more than one transport mode. The seller is responsible for both arranging carriage and delivering the goods, as well as for preparing them to be unloaded at the named place. The one benefit for sellers under this agreement is that he or she does not have to pay duties.
- Responsibility: mostly with the seller
- Transportation costs: mostly with the seller
- Insurance costs: mostly with the seller
Delivered Duty Paid (DDP)
The seller delivers the goods to the named place in the buyer’s country and pays all costs associated with bringing the goods to the destination. This includes import duties and taxes. This Incoterm places the maximum obligations on the seller, although he or she is not responsible for unloading the goods. It is only once the seller transports all the goods to the named place that the remaining risk is transferred to the buyer.
- Responsibility: mostly with the seller
- Transportation costs: mostly with the seller
- Insurance costs: mostly with the seller
Sea and Inland Waterway Transport
Free Alongside Ship (FAS)
The seller is responsible for delivering the goods alongside the buyer’s ship at the named port of shipment. From that moment on, the buyer bears all responsibility and risk associated with the potential loss or damage of goods. In most cases, the seller is responsible for clearing the goods for export.
- Responsibility: the majority is with the buyer
- Transportation costs: the majority is with the buyer
- Insurance costs: the majority is with the buyer
Free on Board (FOB)
This term sets up a situation where the seller has to advance government tax to the country of origin as a commitment to load the goods on board a vessel of the buyer’s choosing. Once the goods are on the vessel, costs and risks are divided between the two parties. The seller pays for the transport of goods and for loading costs, and is also responsible for clearing the goods for export. Risk transfers to the buyer once the shipment is in his or her account, and the buyer is then responsible for clearing the goods for import.
- Responsibility: majority with the buyer
- Transportation costs: majority with the buyer
- Insurance costs: majority with the buyer
Cost and Freight (CFR)
The seller has to pay the costs and freight to bring the goods to the port of destination. However, once the goods are on the vessel all risks are transferred to the buyer. This term does not include any stipulation for insurance.
- Responsibility: the majority with the buyer
- Transportation costs: mostly with the seller
- Insurance costs: the majority is with the buyer
Cost, Insurance, and Freight (CIF)
This is very similar to CFR (see above), except that the seller is also responsible for procuring and paying for insurance.
- Responsibility: the majority is with the buyer
- Transportation costs: mostly with the seller
- Insurance costs: mostly with the seller
The last thing to remember is that you need to confirm with your trade partner that you are both using the same set of Incoterms. Although Incoterms 2010 is the most updated version, some buyers and sellers continue to use older publications by the ICC. This is OK as long as both parties agree to the same set of definitions.
Editor’s Note: This post was originally published in July 2014 and was updated for accuracy and readability in February 2016.
One Comment on ““Incoterms Demystified: Everything You Need to Know””
Very Informative. thanx