Incoterms
what are Incoterms ?
Put simply, Incoterms are the selling terms that the buyer and seller of goods both agree to
during international transactions. These rules are accepted by governments and legal
authorities around the world. Understanding Incoterms is a vital part of International Trade
because they clearly state which tasks, costs and risks are associated with the buyer and the
seller.
The Incoterm states when the seller’s costs and risks are transferred onto the buyer. It’s
also important to understand that not all rules apply in all cases. Some encompass any
mode or modes of transport. Transport by all modes of transport (road, rail, air and sea)
covers FCA, CPT, CIP, DAP, DPU (replaces DAT) and DDP. Sea/Inland waterway transport
(Sea) covers FAS, FOB, CFR and CIF.
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Why are Incoterms vital in International Trade ?
Incoterms are referred to as International Commercial Terms.
They are a set of rules published by the International Chamber of Commerce (ICC), which relate to International Commercial Law.
According to the ICC, Incoterms rules provide internationally accepted definitions and rules of interpretation for most common commercial terms used in contracts for the sale of goods’.
All International purchases will be processed on an agreed Incoterm to define which party legally incurs costs and risks.
Incoterms will be clearly stated on relevant shipping documents.
Rules for any mode or modes of transport:
EXW - Ex-Works or Ex-Warehouse
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
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
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).
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
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)
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 not 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.
DAP - Delivered At Place
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.
DPU - Delivered At Place Unloaded
The seller delivers when the goods, once unloaded, are placed at the disposal of the buyer at a named place of destination.
The seller bears all risks involved in bringing the goods to, and unloading them at the named place of destination.
DDP - Delivered Duty Paid
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 has an obligation 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.
Rules for sea and inland waterway transport:
FAS - Free Alongside Ship
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
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
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
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.
What does ‘Freight Collect’ and ‘Freight Prepaid’ mean?
Freight Collect and Freight Prepaid are common terms used in International Freight. It is very important to understand the difference, it is basically a statement of who will be paying for all the international freight charges.
If you export your goods on ‘Freight Collect’ terms (EXW, FCA, FAS and FOB are all Freight Collect terms) that means that the importer (your buyer) will ‘collect’ and pay all of the freight charges on their side, you will not have to pay any freight at all.
If you are the exporter and sell the goods on CFR, CIF, CPT, CIP, DAP, DPU or DDP terms, this means that you will pay for the freight charges (‘Freight Prepaid’ – you will pre-pay the freight charges).
These are linked to the selling terms of your invoice, if you are selling your goods on ‘FOB’ terms (Free on Board) then you are only covering the costs to get the goods loaded on board the vessel.
All charges thereafter will be charged to the receiver of the goods (consignee) – so it will be Freight Collect.
These freight terms are stated on the Bill of Lading, the document issued by the shipping line or freight forwarder.