Understanding Incoterms

Date of publication: January 18, 2021

As of January 2020, new Incoterms® went into effect to help buyers and sellers agree to terms during international transactions.

What are Incoterms? ®

Incoterms® is an acronym for international commercial terms. A set of internationally-recognized rules issued and trademarked by the International Chamber of Commerce (ICC), Incoterms® define the responsibilities of buyers and sellers in international transactions, including who is responsible for paying for and managing the logistics during a transaction. This includes the:

  • Shipment
  • Insurance
  • Documentation
  • Customs clearance

For individuals involved in the import and export of goods, Incoterms® provide guidance and clarify. They lead to smoother transactions and helps individuals avoid unnecessary costs or risks.

Incoterms® are broken into 11 individual rules, each focusing on a specific part of the import and export process.

The Importance of Incoterms®

Each Incoterms® rule includes a statement about the seller’s responsibility to provide the goods and commercial invoice in conformity with the contract of the sale. Each rule also provides a corresponding statement stipulating that the buyer must pay the price of the goods as provided in the contract of sale. Additionally, each Incoterms® rule has a statement that stipulates which party is responsible for obtaining any official authorization required for the export, such as an export license, and for carrying out any necessary customs formalities.

Incoterms® also specific which party is obligated to contract for the carriage of the goods, and which party bears the cost of handling these tasks and for packing the goods for overseas transport. Finally, each Incoterms® rules specific the seller’s obligations for cargo delivery and clarifies when the delivery takes place, along with specifying when the risk of loss or damage to the imported goods passes from the seller to the buyer.

Incoterms® for All Modes of Transport

Out of the eleven Incoterms®, seven concern any mode of transport. For any mode of transport, the Incoterms® are:

  1. Ex Works (EXW) – Ex works refers to when the seller places the goods at the disposal of the buyer on the seller’s premise or another named place, like a factory or warehouse. The seller is not required to load the goods on any collecting vehicle and does not need to clear them for export, if such clearances are applicable.
  2. Free Carrier (FCA) – Under this rule, the seller delivers the goods to the carrier, or to another person nominated by the buyer, at the seller’s premises or another named place. Both parties are advised to be as specific as possible about the named place of delivery, as the risk is passed onto the buyer at this point.
  3. Carriage Paid To (CPT) – The seller delivers the goods to the carrier, or another person nominated by the seller, at an agreed place, if such a site has been agreed upon between parties. The seller must contract for and pay the costs of carriage necessary to bring the goods to the named destination.
  4. Carriage and Insurance Paid To (CIP) – The seller has the same responsibilities as above under CPT, but they also contract for insurance coverage against the buyer’s loss of or damage to the goods during the carriage. Under CIP, the seller is also required to obtain insurance on minimum cover. If the buyer wants extra insurance protection, they need to agree expressly with the seller on the amount of coverage. Otherwise, they must make their own extra insurance arrangements.
  5. Delivered at Place (DAP) – This rule states that the seller delivers when the goods are placed at the disposal of the buyer of the arriving means of transport and ready for unloading at the named destination. It also requires that the seller bear all risks involved in bringing the goods to the named place.
  6. Delivered at Place Uploaded (DPU) – This replaces a former Incoterms® rule called Delivered at Terminal, or DAT. Under DPU, the seller delivers the goods once they are unloaded and placed at the disposal of the buyer at the named destination. Like under DAP, the seller bears all risks associated with bringing the goods to the named destination, plus all risks involved with unloading the goods.
  7. Delivered Duty Paid (DDP) – Under this rule, the seller delivers the goods when the goods are placed at the disposal of the buyer and cleared for import on the arriving means of transport ready for unloading at the named destination. The seller bears all costs and risks associated with bringing the goods to the destination. Additionally, the seller must clear the products for export and import, pay any duty for both export and import, and carry out all customers formalities.

Incoterms® for Sea and Waterway Transport

While the above seven Incoterms® pertain to all types of transportation, there are four rules that apply specifically to sea and waterway transport.

  1. Free Alongside Ship (FAS) – Under this rule, the seller delivers the goods when they are placed alongside the vessel, like a quay or barge, nominated by the buyer at the named port of shipment. The risk of damage or loss of goods passes when the products are alongside the ship, and the buyer bears all risk from that point forward
  2. Free on Board (FOB) – The seller delivers the goods on board the vessel nominated by the buyer at the named port of shipment, or procures the goods already delivered. From this point forward, the buyer bears all risks or costs.
  3. Cost and Freight (CFR) – Like under FOB, CFR states that the seller delivers the goods on board the vessel or procures the goods so delivered. The risk of loss or damage of the goods passes when the products are on board the vessel, and the seller must contract for and pay the costs and freight necessary to bring the goods to the named port of destination.
  4. Cost Insurance and Freight (CIF) – Under this rule, the seller delivers the goods on board the vessel, or procures the goods already delivered. The risk of loss or damage to the goods passes when the products are on the vessel, and the seller must contract for and pay the necessary costs and freight. Additionally, the seller also contracts for insurance coverage against the buyer’s risk of loss or against damage to the goods during transport. Under CIF, the seller is only required to obtain minimum insurance coverage. If the buyer wants extra protection, they will need to expressly agree with the seller on the amount of coverage, or make their own arrangements for extra insurance protection.

Not Covered by Incoterms®

While the 11 Incoterms® cover many aspects and specifics of a transaction, there are some specific areas not covered by Incoterms®. Incoterms® do not:

  • Address all the conditions of a sale
  • Reference the method or timing of payment negotiated between the seller and buyer
  • Identify the goods being sold
  • Identify when title or ownership of the goods passes from the seller to the buyer
  • Specify what the buyer must provide to the seller to facilitate the customs clearance process at the buyer’s country
  • Address liability for the failure to provide the goods in conformity with the contract of sale or delayed delivery

By specifying important information about risks, costs, location, and responsibility, Incoterms® help both buyers and sellers ensure efficient, safe international transactions.

This content is intended for informational purposes. Due to the generality of this content, the provided information may not be applicable in all situations. We encourage the reader to review the most up-date-regulations directly with the U.S. government’s sources on Incoterms, which can be found here.

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