Incoterms

INCOTERMS 2020

What are Incoterms?

International Commercial Trade Terms, or Incoterms for short, are selling terms buyers and sellers use so they can communicate which party is responsible for the tasks, costs, and risks associated with transferring the goods to the buyer when trading internationally. These are legally binding agreements published by the International Chamber of Commerce (ICC), and followed by virtually all countries.

Every 10 years, the ICC updates the Incoterms to ensure that they stay consistent with the current process of international trade. Incoterms were last updated on January 1st, 2020, and include 11 unique types.

When buyers are purchasing products internationally, sellers will often include a three-letter abbreviation of one of the 11 Incoterms to define what the terms of the trade shall be. These terms represent various tasks, costs, risks, and logistics of getting goods whether by sea freight, air freight, and land freight.

Every Incoterm defines the following responsibilities and obligations:

  • Point of delivery – This section outlines where the goods will be transferred from the seller to the buyer.
  • The responsible party for transportation costs – The section defines which party will cover the freight costs. This component is often characterized as Freight Prepaid or Freight Collect.
  • Export and import requirements – Each term defines whether the seller or buyer is responsible for covering the costs and facilitating the export and import of the cargo.
  • The responsible party of freight insurance – In some Incoterms, freight insurance is a requirement. Each Incoterm will define who must pay for freight insurance.

Here is a simplified explanation of each Incoterm:

EXW – Ex-Works or Ex-Warehouse

  • Ex works is when the seller 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 them 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 explicitly as possible the point within the named place of delivery, as the risk passes to the buyer at that point.

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 products are alongside the ship. 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 products are on board the vessel. 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 products 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 products are on the ship.
  • 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.

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 site 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 has the same responsibilities as CPT, but they also contract 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 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 (replaces Incoterm® 2010 DAT)

  • DPU replaces the former Incoterm® DAT (Delivered At Terminal). 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.  They must clear the products not only for export but also for import, to pay any duty for both export and import and to carry out all customs formalities.

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