Incoterms®

What does Incoterms® stand for?

The word Incoterms® is an abbreviation for International Commercial Terms; these provide a common set of rules used for defining the responsibilities of sellers and buyers in the delivery of goods under sales contracts.

These rules were first published in 1936 and are being updated by the International Chamber of Commerce (ICC) in Paris regularly. Incoterms® are good for about 10 years. The frequency is not fixed, but this has been true historically. They are revised based on dynamism in the international trade practice. If the changes in international trade become very frequent, Incoterms® are revised to match international trade practices.

Incoterms® rules:

This is a set of three-letter trade terms reflecting business practices in contracts for the sale of goods.

Incoterms® rules define the responsibilities of sellers and buyers for the delivery of goods under sales contracts for both domestic and international trade. The following aspects are important to consider:

• The terms aren't law—there are no laws that require their use and they are not all-inclusive;
• They are country neutral—they don't favor one country over another; and
• They are self-contained—all information that determines responsibility and risk are in one place.

Incoterms® reflect worldwide trade practices, as practices change, Incoterms® are revised.

Incoterms® 2010 were written by the ICC, represented by eight individuals from various parts of the world, who:

• Met 11 times in person;
• Received over 2,000 suggestions in the first request; and
• Refined suggestions from four proposals.

The controlling source document is written in British English and will be translated into 35+ languages over the next year.

Incoterms® 2010 have been in effect since 1 January 2011.

11.1 Eleven Golden Rules of Incoterms® 2010 Publication

Below is a list of 11 three-lettered Incoterms®, published under Incoterms® 2010 by ICC. These abbreviations are to be incorporated into the contracts/agreements between sellers and buyers:

• 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
• FAS: FREE ALONGSIDE SHIP
• FOB: FREE ON BOARD
• CFR: COST AND FREIGHT
• CIF: COST INSURANCE AND FREIGHT

11.2 Key Benefits of Using Incoterms® Rules

These rules are an international standard and are accepted throughout the world. They have become part of global trade practice. Incoterms® provide clarity to sellers and buyers, which reduces the need to include detailed information in the purchase orders. Also, these terms provide a common platform for both the seller and buyer.

Transit damages have been the greatest concern while working with international suppliers. In case contracts are made up without any Incoterms®, it will be difficult to have a clear understanding about the transfer and title of goods, who will do the loading and unloading of material, and many other important points.

11.3 Buyer and Seller Worries

In the absence of Incoterms®, some key points to discuss before concluding a contract would include:

• Who furnishes the goods?
• Who packages the goods in a manner suitable for shipment (export)?
• Who moves the goods from the seller's factory to a port, airport, or border crossing in the seller's country?
• Who arranges for export clearance in the seller's country (if applicable)?
• Who arranges for main carriage (international transportation) from the departure port to the arrival port?
• Who pays for the main carriage?
• Who insures the shipment?
• Who arranges for import clearance?
• Who pays import duties?
• Who pays for on-carriage from the arrival port to the delivery destination?
• Who arranges and pays for country-specific documentation (e.g., consular invoices, inspection reports, licenses, etc.)?

11.4 Classification of Incoterms® Based on Mode of Shipment

11.4.1 Any Mode or Modes of Transport

This class includes the seven Incoterms® 2010 rules that can be used irrespective of the mode of transport selected and irrespective of whether one, or more than one, mode of transport is employed.

The following belong to this class:

EXW, FCA, CPT, CIP, DAT, DAP, and DDP

They can be used even when there is no maritime transport at all. It is important to remember, however, that these rules can be used in cases where a ship is used for part of the carriage.

11.4.1.1 Ex-Works + (Named Place)

Named place is generally the seller's location (or where the product initially ships from).

• Delivery – The seller delivers goods when placed at the buyer's disposal at the named place of delivery:

• Goods are packaged, and
• Goods are not loaded on the collecting vehicle.

• Seller risks – The minimum obligation for the seller; once packaged, there is a loss of control over transportation movement, where the package is finally received, and how the export or import documentation is presented to relevant governments.
• Buyer risks – The buyer bears all costs and risks involved in taking the goods from the named place.

• Carriage: Buyer responsibility to arrange for pre-carriage, main carriage, and on-carriage insurance.
• Neither party is required to insure goods.

• Export/import clearance – The buyer must handle all requirements and pay all associated duties and fees.

Note: This should not be used when the buyer cannot carry out export requirements directly or indirectly.

11.4.1.2 Free Carrier (FCA) + (Named Place)

Named place is generally:

• Seller's place of business
• Seller is responsible for having goods available when promised, packaged to the extent known or agreed, and loaded onto collecting vehicle
• Buyer is responsible for pre-carriage, main carriage, and on-carriage
• Another location on the seller's side (e.g., international airport, freight forwarder warehouse for consolidation, or another location agreed upon by the seller and buyer)
• Seller is responsible for having goods available when promised, packaged to the extent known or agreed upon, loaded onto the collecting vehicle, and pre-carriage until agreed upon location of material transfers from seller to buyer; subsequent pre-carriage, main carriage, and on-carriage
• Buyer is responsible for unloading pre-carriage delivering vehicle, main carriage, and on-carriage
• Contract of carriage – buyer is responsible for making a contract of carriage; however, if requested, or if the buyer does not give instructions in due time, the seller may contract for carriage on usual terms at the buyer's risk and expense
• Risk passes to buyer at point of delivery
• Insurance – neither party is required to insure goods
• Export clearance – handled by seller
• Associated licenses can be obtained and maintained under United States law
• Automated export system filings can be completed by the seller
• Import clearance – handled by the buyer—responsible for the customs formalities and any duties, fees, and other charges due upon importation
• FCA Incoterm® is most commonly used in international contracts

11.4.1.3 Carriage Paid to (CPT) + Named Place (on Buyer's Side)

• Delivery – seller delivers goods to a carrier or another person nominated by the seller, at an agreed-upon place, for transportation to the named destination on the buyer's side, appropriately packaged
• Carriage – seller chooses and pays cost of carriage to bring the goods to the named destination (the final location, not the destination port)
• Risks – seller bears all risks and costs incurred until the goods are delivered to the first carrier on the seller's side
• Export clearance – handled by seller
• Import clearance – buyer is responsible for paperwork and all costs
• Insurance – neither party required

Note: Risk of loss passes from seller's side to buyer, but cost is seller's responsibility to named location on buyer's side.

11.2.1.4 Carriage and Insurance Paid to (CIP) + Named Place (on Buyer's Side)

• Delivery – seller delivers goods to a carrier or another person nominated by the seller, at an agreed-upon place, for transportation to the named destination on the buyer's side, appropriately packaged
• Carriage – seller pays cost of carriage to bring the goods to the named destination (the final location, not the destination port)
• Risks – seller bears all risks and costs incurred until the goods are delivered to the first carrier on the seller's side
• Export clearance – handled by seller
• Import clearance – buyer is responsible for paperwork and all costs
• Insurance – seller is required to obtain minimum coverage

Note: Risk of loss passes from seller's side to buyer, but cost is seller's responsibility to named location on buyer's side.

11.2.1.5 Delivered at Terminal (DAT) + Named Place (Buyer's Side)

• Delivery – seller delivers goods to named destination terminal on buyer's side, packaged appropriately and unloaded
• Seller responsible for pre-carriage and main carriage
• Buyer responsible for on-carriage
• Risks – transfer from seller to buyer once goods are unloaded on buyer's side at terminal
• Export clearance – seller responsibility
• Import clearance – buyer responsibility—documentation and fees associated
• Insurance – neither party is required to insure

11.2.1.6 Delivered at Place (DAP) + Named Place (Buyer's Side)

• Previously contained elements of DDU, DAF, and DES terms
• Delivery – seller delivers the goods to the buyer at the named place on the buyer's side, appropriately packaged, but not unloaded
• Carriage – seller handles all carriage to named place on buyer's side
• Risks transfer from seller to buyer once goods are delivered to the named place on buyer's side
• Export clearance – seller handles
• Import clearance – buyer handles and pays associated costs
• Insurance – neither party is required to insure

11.2.1.7 Delivered Duty Paid (DDP) + Named Place (Buyer's Side)

• Delivery – seller delivers goods to the buyer, cleared for import upon the arrival of transportation, but not unloaded at the final destination
• Carriage – seller handles all carriage to named place on buyer's side
• Risks – transfer from seller to buyer once goods are delivered to the named place on the buyer's side
• Export clearance – seller handles
• Import clearance – seller handles and pays for any charges associated
• Insurance – neither party is required to provide insurance

11.4.2 Sea and Inland Waterway Transport

In the second class of Incoterms® 2010 rules, the point of delivery and the place to which the goods are carried to the buyer are both ports, hence the label “sea and inland waterway” rules.

The following belong to this class:

FAS, FOB, CFR, and CIF.

Under the last three Incoterms® rules, all mention of the ship's rail as the point of delivery has been omitted in preference for the goods being delivered when they are “on board” the vessel.

This more closely reflects modern commercial reality and avoids the rather dated image of the risk swinging to and fro across an imaginary perpendicular line.

11.4.2.1 Free Alongside Ship (FAS) + Named Place (Alongside Vessel at Port on Seller's Side)

• Delivery – seller delivers goods to buyer alongside the vessel chosen by the buyer at the named port of shipment, packaged appropriately
• Seller handles pre-carriage
• Buyer handles main carriage and on-carriage
• Risks pass from seller to buyer once goods are placed alongside the vessel on the seller's side
• Insurance – neither party is required to insure goods
• Export clearance – seller handles
• Import clearance – buyer is responsible for requirements and associated fees

11.4.2.2 Free On-Board (FOB) + Named Place (Loaded on Vessel at a Port on the Seller's Side)

• Delivery – seller delivers goods to buyer on board the vessel chosen by the buyer at the named port of shipment, packaged for shipment
• Seller handles pre-carriage
• Buyer handles main carriage and on-carriage
• Risks – pass from seller to buyer once goods are placed on board the vessel on the seller's side
• Insurance – neither party is required to insure goods
• Export clearance – handled by seller
• Import clearance – handled by buyer

Note: “Ship's rail” is no longer part of Incoterms® 2010. If using marine terms, the contract or purchase order must exactly state what “on board the vessel” means for the transaction—where the container is on the vessel and the item to be placed.

11.4.2.3 Cost and Freight (CRF) + Named Place (Port on Buyer's Side)

• Delivery – seller delivers goods packaged for shipment on board the seller-designated vessel at the port on the seller's side
• Seller handles pre-carriage and main carriage
• Buyer handles on-carriage following delivery to port on buyer's side
• Risk passes from seller to buyer once goods are on board the vessel
• Insurance – neither party is required to insure goods
• Export clearance – handled by seller
• Import clearance – buyer is responsible for the customs requirements and associated costs (fees, duties, etc.)

Note: Even though risk passes from seller to buyer on the seller's side (once loaded per contract), seller contracts for and pays freight necessary to bring goods to the named port on the buyer's side.

11.4.2.4 Cost Insurance Freight (CIF) + Named Place (Port on Buyer's Side)

• Delivery – seller delivers goods packaged for shipment on board the seller-designated vessel at the port on seller's side
• Seller handles pre-carriage and main carriage
• Buyer handles on-carriage following delivery to port on the buyer's side
• Risk passes from seller to buyer once goods are on board the vessel
• Insurance – seller is required to procure minimum coverage against buyer's risk of loss or damage to the goods during carriage
• Export clearance – handled by seller
• Import clearance – buyer is responsible for the customs requirements and associated costs (fees, duties, etc.)

Note: Even though risk passes from seller to buyer on the seller's side (once loaded per contract), the seller contracts for and pays freight necessary to bring goods to the named port on the buyer's side, same as CPT + insurance coverage.

11.5 How to Use the Incoterms® 2010 Rules

Incoterms® rules do say which party in the sales contract has the obligation to make carriage or insurance arrangements, when the seller delivers the goods to the buyer, and which costs each party is responsible for. Incoterms® rules, however, say nothing about the price to be paid or the method of its payment. Neither do they deal with the transfer of ownership of the goods, or the consequences of a breach of contract. These matters are normally dealt with through express terms in the contract of sale or in the law governing that contract. The parties should be aware that mandatory local law may override any aspect of the sale contract, including the chosen Incoterms® rule.