Incoterms, short for International Commercial Terms, are a set of standardized three-letter trade terms created by the International Chamber of Commerce (ICC). These terms are widely used in international commercial transactions to define the responsibilities and obligations of buyers and sellers regarding the delivery of goods, the transfer of risk, and the payment of freight and other charges.
Incoterms provide a common language and a set of rules for international trade, reducing misunderstandings and disputes between buyers and sellers.
Responsibilities of the Buyer and Seller
Incoterms define the responsibilities of the buyer and seller at each stage of the transportation process, including the point of delivery, the transfer of risk and the payment of transportation and other charges.
Risk and Cost Allocation
These terms specify when the risk of loss or damage to the goods transfers from the seller to the buyer. They also outline who is responsible for various costs, such as transportation, insurance and customs duties.
Incoterms are applicable to both international and domestic trade, but they are particularly crucial in international transactions where goods cross borders and involve different modes of transportation.
Incoterms are periodically updated to reflect changes in international trade practices. The latest version, Incoterms 2020, came into effect on 1st January 2020.
Use in Contracts
It is essential for parties involved in international trade to clearly specify the chosen Incoterms in their contracts. This helps in avoiding misunderstanding and ensuring a smooth flow of the transaction.
It’s important to note that the specifics of Incoterms and their application may evolve, so it’s advisable to consult the latest ICC publications or seek professional advice when using these terms in international trade transactions.
There are a total of 11 Incoterms, each represented by a three-letter code, set out as follows:-
EXW – Ex works
FOB – Free on Board
CIF – Cost, Insurance and Freight
DDP – Delivered Duty Paid
FAS – Free Alongside Ship
FCA – Free Carrier
CPT – Carriage Paid To
CIP – Carriage and Insurance Paid To
DAT – Delivered at Terminal
DAP – Delivered at Place
CFR – Cost and Freight
- EXW (Ex Works):
- The seller makes the goods available at their premises or another named place (factory, warehouse, etc.).
- The buyer is responsible for all costs and risks associated with transporting the goods from the seller’s location to the final destination.
- FCA (Free Carrier):
- The seller delivers the goods, cleared for export, to the carrier nominated by the buyer at a named place.
- The buyer is responsible for the cost and risk of transporting the goods from the seller’s premises to the destination.
- CPT (Carriage Paid To):
- The seller delivers the goods to the carrier or another person nominated by the seller at an agreed place.
- The seller is responsible for the cost of transporting the goods to the named destination.
- CIP (Carriage and Insurance Paid To):
- Similar to CPT but with the addition that the seller also has to procure insurance against the buyer’s risk of loss or damage to the goods during carriage.
- DAP (Delivered at Place):
- The seller is responsible for delivering the goods, ready for unloading, at the named place of destination.
- The buyer bears all risks and costs after the goods have been delivered.
- DPU (Delivered at Place Unloaded):
- The seller delivers the goods, unloaded, at the named place of destination. The seller bears the risk and cost until the goods are unloaded.
- DDP (Delivered Duty Paid):
- The seller is responsible for delivering the goods to the named place in the buyer’s country, including all costs and risks.
- The seller is also responsible for paying any import duties and taxes.
- FAS (Free Alongside Ship):
- The seller delivers the goods to the port of shipment alongside the vessel nominated by the buyer.
- The buyer is responsible for all costs and risks of loading the goods onto the vessel.
- FOB (Free on Board):
- The seller delivers the goods on board the vessel nominated by the buyer at the named port of shipment.
- The buyer is responsible for the cost and risk of transporting the goods from the seller’s location to the destination.
- CFR (Cost and Freight):
- The seller delivers the goods on board the vessel or procures the goods already so delivered.
- The seller pays for the cost of freight to transport the goods to the named port of destination.
- CIF (Cost, Insurance, and Freight):
- Similar to CFR but with the addition that the seller also has to procure insurance against the buyer’s risk of loss or damage to the goods during carriage.
These terms are designed to clarify the tasks, costs, and risks associated with the transportation and delivery of goods in international trade. The choice of the Incoterm should be clearly specified in the sales contract to avoid misunderstandings between the buyer and the seller.
More information can be found on the Chamber of Commerce website: https://iccwbo.org/business-solutions/incoterms-rules/
If you have any questions regarding Incoterms then please contact us; https://www.channelports.co.uk/contact-us/