Incoterms

Incoterms (International Commercial Terms) are a set of internationally recognised rules that define the responsibilities of buyers and sellers for the delivery of goods under sales contracts. They are published by the International Chamber of Commerce (ICC) and are used to clarify the terms of trade, reducing misunderstandings and disputes between international traders.

Here’s a breakdown of the Incoterms 2020 (the most recent version) used today. There are 11 Incoterms, which are grouped into two categories based on the type of transport and the level of responsibility the seller and buyer hold.

Group 1: Incoterms for Any Mode of Transport (or Multiple Modes)

These can be used for shipments that involve any combination of transport modes (e.g., sea, air, road, rail).

EXW (Ex Works)

Seller’s responsibility: The seller makes the goods available at their premises or another agreed place (factory, warehouse, etc.). The buyer is responsible for all costs and risks involved in taking the goods to the destination.

Buyer’s responsibility: Transport, insurance, customs clearance, and all other risks from the seller’s premises to the final destination.

FCA (Free Carrier)

Seller’s responsibility: The seller delivers the goods to a carrier (or another party) nominated by the buyer at a specified location. The seller is responsible for export duties and clearing goods for export.

Buyer’s responsibility: The buyer takes over the goods from the carrier and assumes responsibility for the cost and risk of transport to the final destination.

CPT (Carriage Paid To)

Seller’s responsibility: The seller pays for the transportation of the goods to a named destination, but the risk transfers to the buyer as soon as the goods are handed over to the carrier.

Buyer’s responsibility: The buyer bears the risk from the moment the goods are handed to the carrier and is responsible for insurance and import duties.

CIP (Carriage and Insurance Paid To)

Seller’s responsibility: The seller pays for the carriage and insurance to the destination. The seller must insure the goods for at least 110% of the contract value.

Buyer’s responsibility: Risk is transferred to the buyer as soon as the goods are handed over to the carrier.

DAP (Delivered at Place)

Seller’s responsibility: The seller delivers the goods to a location in the buyer’s country. The seller is responsible for all risks and costs of transport, but not for import duties or taxes.

Buyer’s responsibility: The buyer is responsible for customs clearance, import duties, and taxes.

DPU (Delivered at Place Unloaded)

Seller’s responsibility: The seller is responsible for delivering the goods and unloading them at a destination agreed upon with the buyer. The seller assumes all costs and risks up to this point.

Buyer’s responsibility: The buyer is responsible for import duties and further transportation costs beyond the point of delivery.

DDP (Delivered Duty Paid)

Seller’s responsibility: The seller is responsible for all costs and risks involved in delivering the goods to the buyer’s premises or another agreed location, including customs duties, taxes, and unloading costs.

Buyer’s responsibility: The buyer only receives the goods at the agreed destination and takes delivery.

Group 2: Incoterms for Sea and Inland Waterway Transport

These terms are specifically used for the transportation of goods by sea or inland waterway.

FAS (Free Alongside Ship)

Seller’s responsibility: The seller is responsible for delivering the goods alongside the vessel at the port of shipment. The seller bears all costs and risks until this point.

Buyer’s responsibility: The buyer assumes responsibility for loading the goods onto the ship, freight charges, insurance, and other costs after the goods are placed alongside the ship.

FOB (Free on Board)

Seller’s responsibility: The seller is responsible for delivering the goods on board the ship at the port of shipment and bearing all costs and risks until the goods are on board.

Buyer’s responsibility: The buyer assumes responsibility once the goods are on board the ship, including transport, insurance, and import duties.

CFR (Cost and Freight)

Seller’s responsibility: The seller is responsible for the cost of transporting the goods to the destination port. However, the risk transfers to the buyer once the goods are on board the ship.

Buyer’s responsibility: The buyer takes responsibility for the risk once the goods are on board, including unloading, import customs, and any further transport.

CIF (Cost, Insurance, and Freight)

Seller’s responsibility: The seller is responsible for the cost of goods, transport, and insurance to the destination port. The seller also has to insure the goods for at least 110% of the contract value.

Buyer’s responsibility: The buyer assumes risk once the goods are on board the ship and is responsible for unloading, import duties, and further transportation.

Summary of Key Differences

Risk Transfer: In terms like EXW, the risk lies heavily with the buyer from the start, while terms like DDP transfer the majority of risk and responsibility to the seller.

Modes of Transport: Terms like FOB, CFR, and CIF are used specifically for sea transport, while EXW, FCA, DAP, and others can be used for any mode of transport.

Cost of Transport: Incoterms like CPT, CIP, and CFR involve the seller paying for transportation, but risk is transferred at different points.

These Incoterms are crucial in international trade because they define each party’s responsibilities clearly, making it easier for both sellers and buyers to manage the logistics and financial aspects of their transactions.