Incoterms are a set of three-letter terms that reflect business-to-business practice in contracts for the sale of goods. They are referred to as the “common language” of trade as they clearly state which tasks, costs and risks are associated with the buyer and the seller.
Incoterms stands for International Commercial Terms. They can be seen as a set of rules which were first published by the International Chamber of Commerce (ICC) in 1936, relating to the International Commercial Law. This means that according to the International Chamber of Commerce (ICC), the Incoterm rules offer internationally accepted rules and definitions for the most common commercial terms which are being used in contracts for the sale of goods. Nevertheless, some things are not covered by the Incoterms, such as all the detailed conditions of a sale, identification of the goods nor the list price, timing of payment as negotiated between the seller and the buyer, when the title or ownership pass from the seller to the buyer, a specification of which documents are being required and lastly, liability for the failure to provide the goods in conformity with the contract of sale, delayed delivery nor dispute resolution mechanisms.
In total, there are eleven different Incoterms: seven for any mode of transportation (FCA, CPT, CIP, DAP, DPU, DDP, EXW) and four for the sea and inland waterway (FAS, FOB, CFR, CIF). Additionally, Incoterms can be divided into groups. E terms (EXW) stand for “Departure”, F terms (FCA, FAS, FOB) stand for “Main Carriage Unpaid”, C terms (CFR, CIF, CPT, CIP) stand for “Main Carriage Paid” and D terms (DPU, DAP, DDP) stand for “Arrival”.
Incoterms rules are not mandatory as they are not laws that are being made by the government. However, they are still needed as they can be seen as guidelines agreed to by both parties (seller and buyer) to a contract that assures the costs, risks, and responsibilities of a shipment before it takes place.
In 2020, Incoterms 2010 changed to Incoterms 2020 while mainly remaining the same, only a few key updates and changes were made. The main changes include that the term DPU is now replacing the term DAT to avoid confusion regarding the word “terminal” that was previously included in the term. The Incoterm CIP now requires an Institute Cargo Clause A instead of C. Additionally, the Incoterms 2020 provide much more detail when it comes to costs and security allocations. Next to that the Incoterms 2020 allow for the provision for the buyer or seller’s means of transport. Lastly, provisions have been made to state that the buyer must instruct the carrier to issue a transport document stating that the goods have been loaded.
What are the advantages and disadvantages of Incoterms?
All Incoterms play a central role in trade contracts, affecting pricing, liability and logistics. Below you can find a short description of each Incoterm.
The Incoterm “Ex Works” (EXW) indicates that the seller’s responsibility ends when the goods are made available for pick-up at their premises or another named place, for instance, a factory or warehouse. From that moment on, the buyer assumes all costs, risks and responsibilities associated with transporting the goods to their final destination.
The Incoterm “Free Carrier” (FCA) indicates that the seller’s responsibility ends when the goods are made available at a location specified by the buyer and then are unloaded to the carrier’s vehicle. From that moment on, the buyer assumes all costs, risks and responsibilities associated with transporting the goods to their final destination.
The Incoterm “Free Alongside Ship” (FAS) indicates that the seller’s responsibility ends when the goods are made available alongside the buyer’s ship or destination port. From that moment on, the buyer assumes all costs, risks and responsibilities associated with transporting the goods to their final destination.
The Incoterm “Free on Board” (FOB) determines the point in the supply chain when the buyer or seller becomes responsible for the transported goods. Here, the risk of loss or damage passes when the products are on board the vessel. From this moment on, the buyer bears all the following costs.
The Incoterm “Cost & Freight” (CFR) states that the seller is responsible for delivering the goods, clearing them for export, arranging their transportation and loading the goods onto the vessel. Once they are loaded, the responsibility shifts to the buyer.
The Incoterm “Cost, Insurance & Freight” (CIF) states that the seller is responsible for the transportation, insurance and freight while it is in transit. The buyer on the other hand bears the responsibility for the import and the delivery to the final destination.
The Incoterm “Carriage Paid To” (CPT) states that the seller is responsible until the goods have been delivered to the first carrier nominated by the buyer. Here, the seller must contract for and pay the costs of carriage that is necessary to deliver the goods to the named place of destination.
The Incoterm “Carriage & Insurance Paid To” (CIP) states that the seller has the same responsibilities as for the Incoterm CPT, but additionally, the seller must also contract for insurance cover against the buyer’s risk of loss or damage to the goods during transportation. However, it is enough to obtain the insurance on minimum cover.
The Incoterm “Delivered at Place Unloaded” (DPU) replaces the Incoterm 2010 “Delivered at Terminal” (DAT). It states that the seller is responsible until the goods have been delivered and unloaded at an agreed-upon destination. From that moment on the risk shifts to the buyer who is responsible for all necessary import duty, taxes and customs clearance.
The Incoterm “Delivered at Place” (DAP) states that the seller is responsible until the goods have been delivered and unloaded at an agreed-upon destination. When the goods are ready to be unloaded by the seller, the buyer takes over the risks and responsibilities for the goods.
The Incoterm “Delivered Duty Paid” (DDP) states that the seller is responsible for all transportation and costs until the goods have been delivered at an agreed-upon destination. The seller is only responsible for unloading the goods.
ALS gladly supports you by guiding you through the process of using Incoterms and offers professional consultancy.
Incoterms – short for international commcerial terms – are being used to clarify rules and terms of the international customs trade.
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