The Incoterms® rules are a set of contractual provisions that can be incorporated into the contracts of sale of goods. They have been developed and maintained by experts brought together by the International Chamber of Commerce (ICC). First published in 1936, the rules are subject to periodical revisions by the ICC to account for changing modes of transport and document delivery. The rules have become the global standard for international trade because they help exporters, importers, insurers, and carriers to avoid costly misunderstandings by clearly defining the responsibilities of sellers and buyers for the delivery of goods. They consist of 3-letter abbreviations for lengthy contract provisions.
Classification of Incoterms® Rules
Incoterms® rules are grouped into four categories.
E term (EXW)
The only term where the exporter/seller makes the goods available at his/her own premises to the importer/buyer.
F terms (FCA, FAS and FOB)
Terms where the exporter/seller is responsible for delivering the goods to a named carrier by the buyer.
C terms (CFR, CIF, CPT and CIP)
Terms where the exporter/seller is responsible for contracting and paying for carriage of the goods, but not responsible for additional costs or risk of damage or loss to the goods once they have been shipped.
D terms (DPU, DAP and DDP)
Terms where the exporter/seller is responsible for all costs and risks associated with delivering the goods to the place of destination.
Not all Incoterms® rules are adequate for all modes of transport. Some terms were designed specifically for sea vessels while others were meant to be applicable to all modes. Below are extracts of the 11 rules from the latest Incoterms® 2020 revision. The list is ordered in increasing risk and liability to the exporter/seller.
Rules for any Mode or Modes of Transport
EXW - Ex Works (…named place)
“Ex Works” means that the seller delivers when it places the goods at the disposal of the buyer at the seller’s premises or at another named place (i.e., works, factory, warehouse, etc.). The seller does not need to load the goods on any collecting vehicle, nor does it need to clear the goods for export, where such clearance is applicable.
FCA - Free Carrier (…named place)
“Free Carrier” means that the seller delivers the goods to the carrier or another person nominated by the buyer at the seller’s premises or another named place. The parties are well advised to specify as clearly as possible the point within the named place of delivery, as the risk passes to the buyer at that point.
CPT - Carriage Paid To (…named place of destination)
“Carriage Paid To” means that the seller delivers the goods to the carrier or another person nominated by the seller at an agreed place (if any such place is agreed between parties) and that the seller must contract for and pay the costs of carriage necessary to bring the goods to the named place of destination.
CIP - Carriage And Insurance Paid To (…named place of destination)
“Carriage and Insurance Paid to” means that the seller delivers the goods to the carrier or another person nominated by the seller at an agreed place (if any such place is agreed between parties) and that the seller must contract for and pay the costs of carriage necessary to bring the goods to the named place of destination. The seller also contracts for insurance cover against the buyer’s risk of loss of or damage to the goods during the carriage. The buyer should note that under CIP the seller is required to obtain insurance only on minimum cover. Should the buyer wish to have more insurance protection, it will need either to agree as much expressly with the seller or to make its own extra insurance arrangements.
DPU - Delivered at Place Unloaded (…named place of destination)
“Delivered at Place Unloaded” means that the seller delivers when the goods, once unloaded from the arriving means of transport, are placed at the disposal of the buyer at a named place of destination. This maybe any place such as a port or terminal, quay, warehouse, container yard or road, rail or air cargo terminal. The seller bears all risks involved in bringing the goods to and unloading them at the named place of destination.
DAP - Delivered At Place (…named place of destination)
“Delivered at Place” means that the seller delivers when the goods are placed at the disposal of the buyer on the arriving means of transport ready for unloading at the named place of destination. The seller bears all risks involved in bringing the goods to the named place. DAP replaces the earlier Incoterms® DAF, DDU.
DDP - Delivered Duty Paid (…named place of destination)
“Delivered Duty Paid” means that the seller delivers the goods when the goods are placed at the disposal of the buyer, cleared for import on the arriving means of transport ready for unloading at the named place of destination. The seller bears all the costs and risks involved in bringing the goods to the place of destination and is obliged to clear the goods not only for export but also for import, to pay any duty for both export and import and to carry out all customs formalities.
This 2020 revision changed rule DAT into DPU.
Earlier, the 2010 revision had 4 Incoterms® rules dropped: DAF (Delivery at Frontier), DES (Delivery ex-ship), DEQ (Delivery ex-quay) and DDU (Delivery duty unpaid). Two new rules were introduced back then: DAT - Delivery at Terminal (replaced DEQ) and DAP – Delivery at Place (replaced DAF, DES and DDU).
Rules for Sea and Inland Waterway Transport
FAS - Free Alongside Ship (…named port of shipment)
“Free Alongside Ship” means that the seller delivers when the goods are placed alongside the vessel (e.g., on a quay or a barge) nominated by the buyer at the named port of shipment. The risk of loss of or damage to the goods passes when the goods are alongside the ship, and the buyer bears all costs from that moment onwards.
FOB - Free On Board (…named port of shipment)
“Free On Board” means that the seller delivers the goods on board the vessel nominated by the buyer at the named port of shipment or procures the goods already so delivered. The risk of loss of or damage to the goods passes when the goods are on board the vessel, and the buyer bears all costs from that moment onwards.
CFR - Cost and Freight (…named port of destination)
“Cost and Freight” means that the seller delivers the goods on board the vessel or procures the goods already so delivered. The risk of loss of or damage to the goods passes when the goods are on board the vessel. The seller must contract for and pay the costs and freight necessary to bring the goods to the named port of destination.
CIF - Cost, Insurance and Freight (…named port of destination)
“Cost, Insurance and Freight” means that the seller delivers the goods on board the vessel or procures the goods already so delivered. The risk of loss of or damage to the goods passes when the goods are on board the vessel. The seller must contract for and pay the costs and freight necessary to bring the goods to the named port of destination. The seller also contracts for insurance cover against the buyer’s risk of loss of or damage to the goods during the carriage. The buyer should note that under CIF the seller is required to obtain insurance only on minimum cover. Should the buyer wish to have more insurance protection, it will need either to agree as much expressly with the seller or to make its own extra insurance arrangements.
Table of the Incoterms rules and the responsibilities of each party
We recommend consulting a trade expert for all international transactions.
Use of Incoterms® rules
Incoterms® rules are not ‘laws’ and they are not implied into contracts for the sale of goods. It is important for the seller and buyer to agree on the terms of sale and know precisely what is included in the sale price. Exporters should choose the Incoterms® rule that works best for their companies, but also, be prepared to quote on other terms. While inserting an Incoterms® rule on a quotation or commercial invoice, the exporter should follow the term by the point of exchange of responsibility, i.e. the named place/port of load/discharge (for example “CIF Rotterdam”, “FOB Shanghai”).
Choose the right Incoterms® rules
The two most popular Incoterms® rules in maritime shipping are CIF and FOB. Many factors influence the most proper term for a given transaction. However, in order for traders to maximize their profits, the rule of thumb is to sell CIF and buy FOB.
Selling on CIF terms allows the exporter to make a slightly higher profit because he/she is able to choose and negotiate the freight services. Buying on FOB terms means the importer can save on costs through the negotiation of better freight deals on his/her end. When it comes to air shipments, FOB is sometimes wrongly assigned, where FCA should be the correct Incoterms® rule to use. A company without experience in international trade, or with a small cargo volume, might prefer to use EXW term because that poses less trouble with a shipment.
FCA is the preferred choice for containerised goods.
Limitations
Incoterms® rules can be useful, but their usage has limitations because they do not convey on their own the full intent of the parties. They will NOT:
- Apply to contracts of services.
- Refer to the contract of carriage of the goods.
- Clarify details of the transport, transfer, and delivery of the goods.
- Specify how to do the transfer of title to the goods.
- Protect a party from her/his own risk of loss.
- Cover the goods before or after delivery.
- Define the actions following a breach of contract.
CargoBid allows shippers to specify the desired Incoterms® rule in every freight auction.
You can find more on Incoterms® by visiting the ICC’s online bookstore. “Incoterms” and the Incoterms® logo are registered trademarks of the International Chamber of Commerce.
About the author
|
