Incoterms: Playing by the Rules

Tags: Global Logistics, Logistics, Supply Chain

When doing business globally, who pays the freight, you or your vendor? Who assumes the risk if cargo is damaged? Enter Incoterms, a set of international rules that interprets the most commonly used trade terms.

When global companies enter into contracts to buy and sell goods, they are free to negotiate specific terms. These terms include the price, quantity, and characteristics of the goods. Every international contract also contains what is referred to as an Incoterm, or international commercial term. Applying Incoterms to sale and purchase contracts makes global trade easier and helps partners in different countries understand one another.

In 1933, the International Chamber of Commerce published the first version of the Incoterms, short for International Commercial Terms. The current version of the predefined commercial terms governing movement of freight is Incoterms 2010, published in January 2011.

The 11 terms primarily define when risk for the cargo passes from seller to buyer and which party is responsible for freight and insurance costs. The first letter in the terms is significant:

  • C terms: Require the seller to pay for shipping.
  • D terms: The seller or shipper's responsibility ceases at a specified point, and they deal with who will pay pier, docking, and clearance charges.
  • E terms: When the goods are ready to leave the seller's premises, their responsibility ceases.
  • F terms: The primary cost of shipping is not met by the seller.

The current Incoterms are divided into two categories: one for any mode of transport, and the second for sales that solely involve non-containerized shipping by sea or inland waterways. This distinction reflects the fact that the condition of the freight can be verified only at the point of loading on board the vessel. The condition of freight in sealed containers cannot be verified at the time of loading.

Here's a brief description of the 11 terms that comprise Incoterms 2010. The full Incoterms also define common terms such as "delivery," "arrival" and "free." Incoterms is a registered trademark of the International Chamber of Commerce. You can obtain the full official text of the rules from the ICC BusinessBookstore.

Rules for any Mode(s) of Transport

EXW (Ex Works)

The seller has placed the goods at the disposal of the buyer at the seller's premises or at another named place (i.e., factory, warehouse, etc.). The seller does not need to load the goods nor clear the goods for export. The buyer assumes transportation costs and risks.

FCA (Free Carrier)

The seller has delivered the goods to the carrier or a buyer's representative at the seller's premises or another named place. The parties should 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)

The seller has delivered the goods to the carrier or representative at an agreed place and the seller must contract for and pay the costs of carriage necessary to bring the goods to the named destination.

CIP (Carriage And
Insurance Paid To)

The seller has delivered the goods to the carrier or a representative of the seller at an agreed place, and the seller must contract for and pay the costs of carriage necessary to bring the goods to the named place of destination, as well as 110 percent insurance coverage of the value of the goods against the buyer's risk of loss or damage to the goods during the carriage.

DAT (Delivered At Terminal)

The seller has delivered when the goods, once unloaded from the arriving means of transport, are placed at the disposal of the buyer at a terminal or other named destination. "Terminal" includes a place, whether covered or not, such as a 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)

The seller has delivered when the goods are placed at the disposal of the buyer on the arriving means of transport ready for unloading at the named destination. The seller bears all risks involved in bringing the goods to the named destination. The buyer is responsible for duties and taxes at the destination. This term replaced the former Delivery Duty Unpaid (DDU) Incoterm.

DDP (Delivered Duty Paid)

The seller has delivered 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 destination. The seller bears all costs and risks involved in transporting the goods to the place of destination and bears the obligation to clear the goods not only for export but also for import and to pay any taxes and duties for both export and import and fulfill all customs formalities.

Following The Rules: Who's responsible for the cargo, and when?

Rules For Sea and Inland Waterway Transport

FAS (Free Alongside Ship)

The seller has delivered when the goods are placed alongside the vessel (e.g., on a quay or a barge) designated by the buyer at the named shipment port. The risk of loss or damage to the goods passes when the goods are alongside the ship, and the buyer bears all costs from that moment onward.

FOB (Free On Board)

The seller has delivered the goods on board the vessel designated by the buyer at the named port, or procures the goods already on board. The risk of loss or damage to the goods passes when the goods are on board the vessel, and the buyer bears all costs from that moment forward.

CFR (Cost and Freight)

The seller has delivered the goods on board the vessel or procures the goods already on board a vessel. The risk of loss or damage to the goods passes when the goods are on board the vessel. The seller must contract for and pay the freight costs necessary to bring the goods to the destination port. This term does not include insurance for the freight during transit.

CIF (Cost, Insurance and Freight)

The seller has delivered the goods on board the vessel or procures the goods already on the vessel. The risk of loss 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 and also contract for insurance for 110 percent of the goods' value against the buyer's risk of loss or damage to the goods during carriage. The buyer must procure any additional insurance coverage or negotiate coverage with the seller. The seller must provide to the buyer all documents necessary to obtain the goods or make an insurance claim. This term is used specifically for non-containerized freight.






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