An Introduction to Incoterms

What are Incoterms?

Incoterms are a crucial aspect of international sales contracts. They are a series of 3-letter terms which define the roles of both the seller and the buyer in international transactions. They can also be known as ‘trade terms’ and are put in place in order to inform both the buyer and seller of what is required of them regarding the delivery process of a commodity, and explains the cost division, risks and export and import clearance between both parties. Incoterms are reviewed and revised every 10 years by the International Chamber of Commerce (ICC). The ICC has now launched the 2020 Incoterms, consisting of 11 total incoterms which will all be further explored below. Seven of the 2020 incoterms refer to all modes of transport whilst the other four solely concern ocean freight.

The rules of Incoterms are accepted and practised worldwide by governments and legal authorities in order to interpret the most widespread and commonly used terms in international trade. As incoterms are standardised globally, they seek to remove any uncertainties that could potentially arise from different countries’ interpretations of rules. In this way, incoterms are incorporated into international sales contracts regularly across the globe.

The first international trade terms were issued in 1923 by the ICC but it wasn’t until 1936 that the first edition known as ‘incoterms’ was published. Incoterms 2020 is the official ninth version of the trade terms and was published back in September 2019.

There exists another group of terms within incoterms that each possess special meaning. To fully understand the 11 2020 incoterms, it is first important to establish these specific definitions:

Delivery – The point of the transaction at which the risk of any loss or damage to the commodity is transferred from the seller to the buyer.

Arrival – The point stated within an incoterm at which the carriage has been paid

Free – Where the seller has the obligation to deliver the commodity to a named place for transfer to a carrier

Carrier – A carrier is any person who undertakes the execution of transport by rail, road, air, sea or inland waterway or indeed, any combination of said transportation modes within a contract of carriage

Freight forwarder – An institution that makes or assists in the shipping arrangements

Terminal – Regardless of covering, a terminal is any place such as a dock, warehouse, container yard, container road, rail or air cargo terminal

To clear for export – Refers to filing Shipper’s Export Declaration and getting an export permit

Having covered the basic definitions require to understand incoterms, the 2020 incoterms for all modes of transport can now be explained.

Seven Incoterms for all modes of transport

EXW – Ex Works

This term refers to the buyer bearing full costs and risks of loading and moving the goods from the point of origin to the destination, which includes arranging for the export clearance. The seller’s sole responsibility is to make the goods available at the seller’s own premises. A trading term such as this is not ideal for international moves.

FCA – Free Carrier

This term refers to two different options: delivery is made when the commodity is loaded onto the mode of transport which the buyer has provided at the location stated by the seller, or delivery is made when the commodity is placed at the disposal of the buyer’s carrier and cleared for export by the seller. Within both delivery options, the buyer bears the costs and risks of moving the commodity to the destination.

CPT – Carriage Paid To

The seller hands over the commodity to the carrier chosen by the seller, cleared for export, who then pays for the moving of the commodity to the named place of destination and in this way, the seller transfers risk of loss or damage. From the time the commodity is transferred to the first carrier onwards, the buyer bears the risks of any loss or damage.

CIP – Carriage And Insurance Paid To

The seller hands over the commodity to the carrier chosen by the seller, cleared for export, who then pays for the moving of the commodity to the named place of destination and in this way, the seller transfers risk of loss or damage. From the time the commodity is transferred to the first carrier onwards, the buyer bears the risks of any loss or damage. However, the seller purchases cargo insurance through to the named place of destination.

DPU – Delivered At Named Place, Unloaded

Once the commodity is unloaded from the arriving mode of transport, the seller delivers, and the commodity is placed at the buyer’s disposal at a place of destination. The seller bears all risks when bringing the commodity to the terminal at the named place of destination and during unloading. DPU is the only incoterm which results in the seller paying for unloading at destination. With this being the case, it is highly recommended to be as specific as possible when it comes to the named place of destination since the seller accounts for all costs through to unloading.

DAP – Delivered At Place

When the commodity is placed at the buyer’s disposal on the arriving mode of transport and is ready for unloading at the named place of destination, the seller delivers. The seller bears all risks involved in bringing the commodity to the named destination.

DDP – Delivered Duty Paid

The seller delivers the commodity to the buyer when the commodity is placed at the buyer’s disposal, cleared for import, on the arriving mode of transport and ready to be unloaded at the named destination. The seller bears all costs and risks of moving the goods to destination including all the payments of Customs duties and taxes. This incoterm has certain limitations as the importing country may have customs formalities and may not easily allow the seller to be the legal importer of record. In such a case, DAP or DPU are the recommended incoterms.

Four Incoterms for Ocean Freight Usage

FAS – Free Alongside Ship

The seller delivers the commodity to the buyer when the commodity is cleared for export and placed alongside the ship which has been nominated by the buyer at the port named for shipment. From this point onwards, the buyer bears all costs and risks of any loss or damage.

FOB – Free On Board

The seller delivers the goods to the buyer on board the vessel nominated by the buyer, cleared for export, at the seaport or wharf which has been named as place of shipment. From this point onwards, the buyer bears all costs and risks of any loss or damage.

CFR – Cost And Freight

The seller delivers the commodity to the buyer on board of the vessel, cleared for export to the named port of destination. The buyer bears all risks of loss or damage once it is on board. In cases where multiple modes of transport are used, for example when the commodity is handed over to a carrier at a container terminal, CPT is the highly recommended incoterm to use instead of CFR.

CIF – Cost Insurance And Freight

The seller delivers the commodity to the buyer on board of the vessel, cleared for export to the named port of destination. The buyer bears all risks of loss or damage once it is on board. However, the seller is responsible for buying the cargo insurance to the named seaport or wharf of destination. In cases where multiple modes of transport are used, for example when the commodity is handed over to a carrier at a container terminal, CPT is the highly recommended incoterm to use instead of CFR as mentioned above.

We hope this has helped clarify the many acronyms you will see associated with international trade. As incoterms change, it is important for organisations to be up to date with the latest regulations. For more information you can subscribe to our app, Czapp, for the latest market news and updates.

Author: Betty Rook

Images: Zui Hoang, Nigel Tadyanehond