Incoterms

Summary of Incoterms

Incoterms is a conventional codification of terms used in international trade contracts. According to William J. Miller, “local customs and usage imported variations in meaning for such common terms as F.A.S., C.I.F., et cetera, often resulting in disputes between buyer and seller as to the respective obligations of each. In 1936 the Paris-based International Chamber of Commerce published the first Incoterms; the terminology was amended and updated in 1953, 1967, 1976, and 1980. The International Chamber of Commerce urges that merchants incorporate by reference the Incoterms into contracts.”

 

Introduction

Language is one of the most complex and important tools of International Trade. As in any complex and sophisticated business, small changes in wording can have a major impact on all aspects of a business agreement.

Word definitions often differ from industry to industry. This is especially true of global trade. Where such fundamental phrases as “delivery” can have a far different meaning in the business than in the rest of the world.

For business terminology to be effective, phrases must mean the same thing throughout the industry. That is why the International Chamber of Commerce created “INCOTERMS” in 1936. INCOTERMS are designed to create a bridge between different members of the industry by acting as a uniform language they can use.

Each INCOTERM refers to a type of agreement for the purchase and shipping of goods internationally. There are 13 different terms, each of which helps users deal with different situations involving the movement of goods.

INCOTERMS also deal with the documentation required for global trade, specifying which parties are responsible for which documents. Determining the paperwork required to move a shipment is an important job, since requirements vary so much between countries. Two items, however, are standard: the commercial invoice and the packing list.

INCOTERMS were created primarily for people inside the world of global trade. Outsiders frequently find them difficult to understand. Seemingly common words such as “responsibility” and “delivery” have different meanings in global trade than they do in other situations.

In global trade, “delivery” refers to the seller fulfilling the obligation of the terms of sale or to completing a contractual obligation. “Delivery” can occur while the merchandise is on a vessel on the high seas and the parties involved are thousands of miles from the goods. In the end, however, the terms wind up boiling down to a few basic specifics:

• Costs: who is responsible for the expenses involved in a shipment at a given point in the shipment’s journey?
• Control: who owns the goods at a given point in the journey?
• Liability: who is responsible for paying damage to goods at a given point in a shipment’s transit?

It is essential for shippers to know the exact status of their shipments in terms of ownership and responsibility. It is also vital for sellers & buyers to arrange insurance on their goods while the goods are in their “legal” possession. Lack of insurance can result in wasted time, lawsuits, and broken relationships.

Categories

INCOTERMS are most frequently listed by category. Terms beginning with F refer to shipments where the primary cost of shipping is not paid for by the seller. Terms beginning with C deal with shipments where the seller pays for shipping. E-terms occur when a seller’s responsibilities are fulfilled when goods are ready to depart from their facilities. D terms cover shipments where the shipper/seller’s responsibility ends when the goods arrive at some specific point. Because shipments are moving into a country, D terms usually involve the services of a customs broker and a freight forwarder. In addition, D terms also deal with the pier or docking charges found at virtually all ports and determining who is responsible for each charge.

The International Chamber of Commerce changed basic aspects of the definitions of a number of INCOTERMS, buyers and sellers should be aware of this. Terms that have changed have a star alongside them.

EX-Works

One of the simplest and most basic shipment arrangements places the minimum responsibility on the seller with greater responsibility on the buyer. In an EX-Works transaction, goods are basically made available for pickup at the shipper/seller’s factory or warehouse and “delivery” is accomplished when the merchandise is released to the consignee’s freight forwarder. The buyer is responsible for making arrangements with their forwarder for insurance, export clearance and handling all other paperwork.

FOB (Free On Board)

One of the most commonly used-and misused-terms, FOB means that the shipper/seller uses his freight forwarder to move the merchandise to the port or designated point of origin. Though frequently used to describe inland movement of cargo, FOB specifically refers to ocean or inland waterway transportation of goods. “Delivery” is accomplished when the shipper/seller releases the goods to the buyer’s forwarder. The buyer’s responsibility for insurance and transportation begins at the same moment.

FCA (Free Carrier)

In this type of transaction, the seller is responsible for arranging transportation, but he is acting at the risk and the expense of the buyer. Where in FOB the freight forwarder or carrier is the choice of the buyer, in FCA the seller chooses and works with the freight forwarder or the carrier. “Delivery” is accomplished at a predetermined port or destination point and the buyer is responsible for Insurance.

FAS (Free Alongside Ship)

In these transactions, the buyer bears all the transportation costs and the risk of loss of goods. FAS requires the shipper/seller to clear goods for export, which is a reversal from past practices. Companies selling on these terms will ordinarily use their freight forwarder to clear the goods for export. “Delivery” is accomplished when the goods are turned over to the Buyers Forwarder for insurance and transportation.

CFR (Cost and Freight)

This term formerly known as CNF (C&F) defines two distinct and separate responsibilities-one is dealing with the actual cost of merchandise “C” and the other “F” refers to the freight charges to a predetermined destination point. It is the shipper/seller’s responsibility to get goods from their door to the port of destination. “Delivery” is accomplished at this time. It is the buyer’s responsibility to cover insurance from the port of origin or port of shipment to buyer’s door. Given that the shipper is responsible for transportation, the shipper also chooses the forwarder.

CIF (Cost, Insurance and Freight)

This arrangement similar to CFR, but instead of the buyer insuring the goods for the maritime phase of the voyage, the shipper/seller will insure the merchandise. In this arrangement, the seller usually chooses the forwarder. “Delivery” as above, is accomplished at the port of destination.

CPT (Carriage Paid To)

In CPT transactions the shipper/seller has the same obligations found with CIF, with the addition that the seller has to buy cargo insurance, naming the buyer as the insured while the goods are in transit.

CIP (Carriage and Insurance Paid To)

This term is primarily used for multimodal transport. Because it relies on the carrier’s insurance, the shipper/seller is only required to purchase minimum coverage. When this particular agreement is in force, Freight Forwarders often act in effect, as carriers. The buyer’s insurance is effective when the goods are turned over to the Forwarder.

DAF (Delivered At Frontier)

Here the seller’s responsibility is to hire a forwarder to take goods to a named frontier, which usually a border crossing point, and clear them for export. “Delivery” occurs at this time. The buyer’s responsibility is to arrange with their forwarder for the pick up of the goods after they are cleared for export, carry them across the border, clear them for importation and effect delivery. In most cases, the buyer’s forwarder handles the task of accepting the goods at the border across the foreign soil.

DES (Delivered Ex Ship)

In this type of transaction, it is the seller’s responsibility to get the goods to the port of destination or to engage the forwarder to the move cargo to the port of destination uncleared. “Delivery” occurs at this time. Any destination charges that occur after the ship is docked are the buyer’s responsibility.

DEQ (Delivered Ex Quay)

In this arrangement, the buyer/consignee is responsible for duties and charges and the seller is responsible for delivering the goods to the quay, wharf or port of destination. In a reversal of previous practice, the buyer must also arrange for customs clearance.

DDP (Delivered Duty Paid)

DDP terms tend to be used in intermodal or courier-type shipments. Whereby, the shipper/seller is responsible for dealing with all the tasks involved in moving goods from the manufacturing plant to the buyer/consignee’s door. It is the shipper/seller’s responsibility to insure the goods and absorb all costs and risks including the payment of duty and fees.

DDU (Delivered Duty Unpaid)

This arrangement is basically the same as with DDP, except for the fact that the buyer is responsible for the duty, fees and taxes.

Incoterms in International Trade

Meaning of Incoterms, according to the Dictionary of International Trade (Global Negotiator): A set of 11 international standard trade terms which last version is Incoterms 2010. Incoterms allows the parties to designate a point at which the costs and risks of transport are precisely divided between the seller and the buyer. Incoterms also allocate responsibility for customs clearance/duties between the parties. Since Incoterms are not law but are contractual standard terms, they do not apply to a given transaction unless the parties specifically incorporate them by referring to last version of Incoterms. Incoterms are elements of the international sale contract, which may be derived from the seller’s tender or proforma invoice. Thus, Incoterms only apply to the seller and buyer, one of whom will assume dovetail with the Incoterms in terms of allocation of transport costs and risks, but this will depend on the shipper giving precise directions to the carrier to ship according to the constraints of the given Incoterms. The 11 Incoterms are divided in two groups: those than can be used for any mode or modes of transport, and those used only for sea and inland waterway transport.

Incoterms for any mode or modes of transport:

EXW Ex Works.

FCA Free Carrier.

CPT Carriage Paid to.

CIP Carriage and Insurance Paid to.

DAT Delivered at Terminal.

DAP Delivered at Place DDP Delivered Duty Paid.

Incoterms only for sea and inland waterway transport:

FAS Free Alongside Ship.

FOB Free on Board.

CFR Cost and Freight.

CIF Cost, Insurance and Freight.

See each Incoterms for definition of seller’s and buyer’s obligations. Practical Guide to Incoterms.

Hierarchical Display of Incoterms

Trade > International trade > International trade
Education And Communications > Information and information processing > Information processing > Terminology
Production, Technology And Research > Technology and technical regulations > Technical regulations > Standardisation > International standard

Incoterms

Concept of Incoterms

See the dictionary definition of Incoterms.

Characteristics of Incoterms

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Resources

Translation of Incoterms

• Spanish: Incoterms
• French: Incoterms
• German: Incoterms
• Italian: Incoterms
• Portuguese: Incoterms
• Polish: INCOTERMS

Thesaurus of Incoterms

Trade > International trade > International trade > Incoterms
Education And Communications > Information and information processing > Information processing > Terminology > Incoterms
Production, Technology And Research > Technology and technical regulations > Technical regulations > Standardisation > International standard > Incoterms

See also

• Terminology
• International standard

• International Commercial Terms