Incoterms - International Commercial terms Explained

Incoterms Rules for Any Mode of Transport

Incoterms rules are an essential part of international trade. They are a series of standardized terms used in commercial contracts to define the obligations and responsibilities of buyers and sellers.

These trade terms are recognized globally and help prevent confusion or disagreements among the parties involved in import and export.

One of the significant advantages of Incoterms rules is that they provide clarity on the delivery of goods. They define the point at which the risk and responsibility for the goods transfer from the seller to the buyer. This clarification is particularly crucial when goods are being transported across borders, as different countries and regions may have other laws and regulations that can impact the transfer of goods.

The Incoterms rules are divided into two categories: those for any mode of transport and those for sea and inland waterway transport.

The rules for any mode of transport include EXW (Ex Works), FCA (Free Carrier), CPT (Carriage Paid To), CIP (Carriage and Insurance Paid To), DAP (Delivered At Place), and DDP (Delivered Duty Paid).

In summary, the Incoterms rules are an essential tool for global trade. They provide clarity on the delivery of goods, outline the duties and obligations that buyers and sellers have to fulfil in a transaction and help to avoid misunderstandings and disputes. By using these standardized terms in their contracts, businesses can ensure that their transactions are conducted smoothly and efficiently.

Incoterms explained cover 11 terms

International Chamber of Commerce has established these internationally recognized rules to regulate the allocation of costs and risks between buyers and sellers in international transactions. These rules ensure both parties understand their responsibilities and obligations in the delivery process.

EXW (Ex Works)

"EXW" (Ex Works) is a trade term in international commerce that indicates that the seller has fulfilled their obligation by making the goods available at their premises or another named place. From this point, the buyer assumes all costs and risks associated with shipping the goods to their final destin

FCA (Free Carrier)

FCA (Free Carrier) is a trade term used in international commerce. It refers to an agreement between a buyer and a seller in which the seller fulfils their obligation by delivering the goods to a carrier or another party specified by the buyer. The buyer assumes responsibility for the goods once they are delivered to the specified carrier or party.

FAS (Free Alongside Ship)

FAS or Free Alongside Ship is an Incoterm used in global trade to define the seller's responsibility for delivering goods to a specific port. Under this term, the seller is responsible for loading the goods onto the ship and clearing them for export. While the buyer is responsible for the further transportation of goods and the associated costs and risks.

With Free Alongside Ship, the seller bears the cost and risks of delivering the goods to the port, but the buyer takes responsibility for any risks and costs associated with loading the goods onto the ship and transporting them from the port. This means that the buyer must ensure that the goods are loaded safely and securely onto the ship and must bear any costs associated with loading and transportation beyond the port. On the other hand, the seller is only responsible for the delivery of the goods to the port of shipment and must ensure that the goods are cleared for export.

In summary, Free Alongside Ship is a term that defines the responsibility of the seller for delivering goods to a specific port. It is important to understand the risks and responsibilities associated with this term before entering into a contract.

FOB (Free On Board)

FOB (Free On Board) refers to a shipping term used in incoterms where the seller delivers the goods to the port of shipment and is responsible for loading them onto the ship. After that, the buyer assumes responsibility for all costs and risks associated with the goods.

CFR (Cost and Freight)

CFR, or Cost and Freight, is a trade term that refers to the responsibility of the seller. for the goods until they have been loaded onto the shipping vessel. The seller is responsible for all freight costs associated with transporting the goods to the port of shipment, as well as for loading them onto the vessel. Once the goods are loaded onto the vessel, the buyer assumes responsibility for any subsequent freight costs or risks. With CFR, the seller bears the cost and risk of delivering the goods to the port of destination, but the buyer assumes responsibility for any risks and costs associated with unloading the goods and transporting them from the port.

CIF (Cost, Insurance and Freight)

Cost and Freight CIF, commonly known as CIF, is a trade term that refers to the seller's obligation to pay for the cost and freight of goods required to bring them to the port of destination. In other words, CIF means that the seller is responsible for all expenses related to the transportation of goods until they reach the port of destination.

When it comes to international contracts for the sale of goods, the term Cost and Freight CIF is often used to specify the seller's responsibility to cover the cost and freight of goods required to transport them to the port of destination. This means that the seller must pay for all expenses related to the transportation of goods until they reach the port of destination.

CPT (Carriage Paid To)

CPT (Carriage Paid To) is an Incoterm that requires the seller to pay for the carriage of goods to the destination point agreed upon by the buyer and seller. Once the goods are delivered to the carrier, the responsibility and risk of the goods are transferred from the seller to the buyer.

CIP (Carriage and Insurance Paid To)

Carriage and Insurance Paid To (CIP) is one of the Incoterms Rules for Sea and Inland Waterway Transport. Under this rule, the seller is responsible for delivering the goods to a carrier or another person nominated by the seller, and for obtaining insurance against the buyer's risk of loss or damage to the goods during carriage. The seller must also provide the buyer with the necessary documents for the shipment, such as the bill of lading, and any other documents required for the export of the goods.

This term places the responsibility for the transportation and insurance of the goods with the seller until they are delivered to the carrier. Once the goods are in the possession of the carrier, the risk of loss or damage to the goods is transferred to the buyer. This means that the buyer is responsible for any damage or loss that occurs during the transportation of the goods from the carrier to the final destination.

CIP is often used in international trading, particularly in the sale of high-value goods. It is important for both the buyer and the seller to understand the terms of the contract, including the obligations and responsibilities of each party, to ensure the safe and timely delivery of the goods.

DPU (Delivered at Place Unloaded)

DPU or Delivered at Place Unloaded is an Incoterm that defines that the seller is responsible for delivering the goods to a named destination. The seller is responsible for unloading the goods at the specified destination, but the buyer is responsible for any further transportation of the goods from that point. With DPU, the seller bears the risk and cost of delivering the goods to the agreed destination, but the buyer is responsible for any risks and costs associated with unloading the goods.

DAP (Delivery At Place)

Delivery At Place (DAP) is a type of international trading agreement where the seller is responsible for delivering the goods to a specific location that both the buyer and seller have agreed upon.

In this agreement, the seller is responsible for all aspects of delivering the goods, including transportation, insurance, and customs clearance. The buyer is responsible for all taxes and duties associated with importing the goods into their country.

One of the benefits of using the DAP agreement is that it provides both the buyer and seller with a clear understanding of their responsibilities and the costs associated with the transaction. This helps to avoid any misunderstandings or disputes that may arise during the transaction.

It is important to note that under the DAP agreement, the seller is only responsible for delivering the goods to the agreed location. Once the goods have been delivered, the responsibility for any damage or loss of the goods shifts to the buyer. As such, it is important for both parties to ensure that the goods are fully insured during transportation.

DPU (Delivery at Place Unloaded)

DPU (Delivery at Place Unloaded) means that the seller is responsible for delivering the goods to a specific place agreed upon by the buyer, and unloading them at that place.

DDP (Delivered Duty Paid)

DDP or Delivered Duty Paid is an Incoterm that defines the maximum responsibility and risk of the seller in the international trading transaction. With DDP, the seller is responsible for delivering the goods to a named destination in the buyer's country and paying all costs associated with the delivery, including customs duties and taxes. The seller is also responsible for any risks associated with transport until the goods are delivered to the specified destination. DDP is the most comprehensive Incoterm, and it places the highest degree of responsibility on the seller.

Understanding Incoterms Responsibilities

Incoterms responsibilities refer to the obligations and duties that buyers and sellers have to fulfil when engaging in international trade. These responsibilities include determining the delivery point, arranging for transportation, securing insurance, and paying for any associated costs and fees. Additionally, these responsibilities outline the transfer of risk from the seller to the buyer, which occurs at various stages of the shipping process depending on the specific Incoterm used. By understanding these responsibilities, companies can ensure compliance with regulations and avoid potential legal and financial issues.

Incoterms Rules for Sea and Inland Waterway Transport

Incoterms such as FAS, FOB, CFR, and CIF are exclusively applicable to either sea or inland waterway transport, all other terms can be utilized for all modes of transportation, including air, ground, rail, and ocean.

Advantages of Using Incoterms

There are several benefits of using Incoterms in international trade. Clear and concise definition of buyer and seller responsibilities in goods delivery to avoid disputes. Incoterms also specify the point at which risk and costs are transferred from the seller to the buyer. By using Incoterms, parties involved in trade can ensure that they are on the same page and have a common understanding of their obligations and liabilities.

How Incoterms Impact Your Shipping Cost

Incoterms are a set of standardized terms used in international trade that define the responsibilities of the buyer and seller in terms of shipping, insurance, and customs clearance. The use of certain Incoterms can impact the cost of shipping by determining who is responsible for paying for transportation, insurance, and other costs associated with the shipment. It is important for businesses engaged in trade to understand the impact of Incoterms on their shipping costs to ensure that they are able to accurately calculate the total cost of the transaction.

What Do Incoterms Not Cover?

Incoterms are a set of standard trade rules that define the obligations of buyers and sellers. However, it is important to note that there are certain aspects that Incoterms do not cover. These include aspects related to the transfer of ownership of goods, payment terms, and the resolution of disputes.

Incoterms 2010 vs. Incoterms 2020

The differences between Incoterms 2010 and Incoterms 2020 are mostly related to the way they are presented and the language used in the rules. Here are some of the key differences:

The number of Incoterms: Incoterms 2010 had 11 terms, while Incoterms 2020 has 11 as well. However, Incoterms 2020 has removed some of the previous terms and added new ones, such as Delivered at Place Unloaded (DPU) and Carriage and Insurance Paid (CIP).
Presentation of the rules: The Incoterms 2020 rules have been reorganized and presented in a more user-friendly way, with clearer explanations and illustrations.
Security-related requirements: Incoterms 2020 includes new security-related requirements for the carriage of goods, such as the need for cargo information to be communicated in a timely and accurate manner.
Cost allocation: In Incoterms 2020, the cost allocation between the buyer and the seller is clearer, with more emphasis on the allocation of costs related to security and electronic communication.
Insurance: The rules for insurance have been clarified in Incoterms 2020, with more detailed explanations of the different types of insurance and when they should be used.

Overall, Incoterms 2020 provides greater clarity and guidance for buyers and sellers engaging in international trade, and reflects the changes and developments in the global trade environment since the release of the previous version in 2010.

Using 2010 Incoterms After 2020

Yes, you can still use Incoterms 2010 after the release of Incoterms 2020. However, it is important to note that Incoterms 2020 has updated and clarified some of the rules, and therefore it may be beneficial to use the latest version.

If you choose to use Incoterms 2010, it is important to ensure that both parties agree to the terms and that they are clearly stated in the contract. It is also important to ensure that you understand the obligations and responsibilities of both the buyer and the seller under the chosen Incoterms rule.

In general, it is recommended to use the latest version of Incoterms to ensure clarity and consistency in international trade transactions. However, if both parties are comfortable with using Incoterms 2010 and agree on the terms, it is still a valid option to use.

What Shipping Incoterms Don't Cover

Incoterms are a set of rules that define the responsibilities of buyers and sellers in international trade transactions. However, it's important to note that they do not cover every aspect of the transaction. For example, the transfer of title to the goods is typically outlined in the sales contracts and not covered by Incoterms.

Similarly, the quality and quantity of the goods being traded are covered by separate quality control and inspection procedures, rather than by Incoterms.

Payment terms and currency exchange rates used in the transaction are usually negotiated separately between the buyer and seller, and are not covered by Incoterms.

Finally, regulatory compliance requirements such as import/export regulations, licenses, or permits, are typically the responsibility of the buyer or seller depending on the terms of the sales contracts, and are not covered by Incoterms.

Using Incoterms for Domestic Sales

While Incoterms are primarily designed for international trade transactions, they can also be used for domestic sales, where it is necessary to define the responsibilities of buyers and sellers.

In fact, the use of Incoterms for domestic sales can provide greater clarity and transparency in the transaction and can help to reduce the risk of disputes between parties.

For example, if a seller agrees to deliver goods to a buyer's warehouse using the Incoterm DAP (Delivered at Place), it is clear that the seller is responsible for delivering the goods to the specified location, while the buyer is responsible for unloading them and assuming any further costs or risks associated with transportation.

Similarly, if the seller agrees to deliver goods to the buyer's factory using the Incoterm FCA (Free Carrier), it is clear that the seller is responsible for loading the goods onto the carrier, while the buyer is responsible for any further costs or risks associated with transporting the goods to the final destination.

Who Decides Incoterms Rules?

The International Chamber of Commerce (ICC) is the organization responsible for creating and maintaining the Incoterms rules .

As an international chamber that promotes global trade and investment, the ICC established the first set of Incoterms rules in 1936 and has since revised and updated them several times to reflect changes in international trade practices and regulations.

The ICC's latest version of Incoterms, Incoterms® 2020, was published in September 2019 and came into effect on January 1, 2020. The International Chamber of Commerce takes the responsibility of ensuring that the Incoterms rules remain relevant and valuable for businesses engaged in trade, and encourages their adoption and use worldwide.

Similarly, the quality and quantity of the goods being traded are covered by separate quality control and inspection procedures, rather than being addressed by Incoterms.

Payment terms and currency exchange rates used in the transaction are usually negotiated separately between the buyer and seller, and are not covered by Incoterms.

Additionally, regulatory compliance requirements such as import/export regulations, licenses, or permits, are typically the responsibility of the buyer or seller depending on the terms of the sales contract, and are not covered by Incoterms.