A simple guide to understanding Incoterms
These commercial terms (referred to as “Incoterms” or “International Commercial Terms’) are nothing more than a series of three letter acronyms. The letters in the acronyms signify and communicate concepts such as –
who is responsible for a task;
who carries the costs of the transportation and insurance (and to what extent); and
where the risk will pass.
Incoterms 2010 is the eighth set of Incoterms published by the ICC (with the first of them being published in 2000). Over the years, Incoterms have been added, deleted and updated culminating in the Incoterms 2010 as the most recent version. Incoterms 2010 consists of 11 pre-defined terms, subdivided into two categories (based only on the method of delivery). Seven predefined terms may be used regardless of the method of transport (“General Terms”) and the remaining four predefined terms are intended solely for use where the method of transportation is by water, specifically where the condition of goods can be verified at the point of loading on board a ship (so this would naturally exclude containerised freight) (“Maritime Terms”).
EXW-EX Works (named place of delivery)
Under this Incoterm the seller makes the goods available at its premises, or at another named location. This term places the maximum obligation on the buyer and the minimum obligation on the seller. The EX Works term is often used while making an initial quotation for the sale of goods without any costs included. EXW means that a buyer incurs the risks for bringing the goods to the final destination. In this scenario, the seller could be responsible for loading the goods onto the collecting vehicles but does not clear them for export. In circumstances where the seller does load the goods, he does so at the buyer’s risk and cost.
FCA – Free Carrier (named place of delivery)
The seller delivers the goods, cleared for export, at a named place (possibly including the seller’s own premises at the cost of the seller). The goods can be delivered to a carrier nominated by the buyer. In many respects this Incoterm has replaced FOB (the old Free On Board). It should also be noted that the chosen place of delivery affects the obligations of loading and unloading the goods at that place. If the delivery location is under the control of the seller, the seller is responsible for loading. Any other location will result in the obligation being deemed to be that of the buyer.
CPT – Carriage Paid to (named place of destination)
CPT replaces the C&F (cost and freight) and CFR terms for all shipping modes outside of non-containerised sea freight. In this Incoterm, the seller pays for the carriage of the goods up to named place of destination. The goods are considered to be delivered when the goods have been handed over to the first or main carrier, so that the risk transfers to the buyer upon handing goods over to that carrier.
CIP – Carriage and Insurance Paid to (named place of destination)
This term is broadly similar to the CPT term, with the exception that the seller is required to obtain insurance for goods while in transit. CIP requires the seller to the insurance the goods for 110% of the contract value under at least the minimum cover of the Institute of London Cargo Underwriters. CIP can be used for all modes of transport whereas the Incoterm CIF is used in connection with sea freight.
DAT – Delivered at Terminal (named terminal at port or place of destination)
This Incoterm requires that the seller delivers the goods, unload, at the named terminal. The seller covers all the costs of transport (export fees, carriage, unloading from main carrier at destination port and destination port charges) and assumes all risk until arrival at the destination port or terminal.
DAP – Delivered at Place (named place of destination)
This Incoterms stipulates that the seller delivers the goods when they are placed at the disposal of the buyer on the arriving means of transport ready for unloading at the named placed of destination. Under DAP terms, the risk passes from the seller to the buyer from the point of destination mentioned in the contract of delivery.
DDP –Delivery Duty Paid (named place of destination)
Here the seller is responsible for delivering the goods to the named place and country of the buyer, and pays all costs in bringing the goods to the destination including import duties and taxes. The seller is not responsible for unloading. This term places the maximum obligations on the seller and the minimum obligations on the buyer. No risk or responsibilities transfer to the buyer until delivery of the goods at the named place or destination.
FAS – Free Alongside Ship (named port of shipment)
The seller delivers when the goods are placed alongside the buyer’s vessel at the named port of shipment. This means that the buyer must bear all costs and risks of loss of or damage to the goods from that moment. The seller is required to clear the goods for export.
FOB – Free on Board (named port of shipment)
Under FOB terms the seller bears all costs and risks up to the point that the goods are loaded on board the vessel. The seller must also arrange for export clearance.
CFR – Cost and Freight (named port of destination)
The seller pays for the carriage of the goods up to the named port of destination. Risk transfers to the buyer when the goods have been loaded on board the ship in the country of export. CFR should only be used for non-containerised sea freight and inland waterway transport, for all other modes of transport it should be replaced with CPT.
CIF – Cost, Insurance and Freight (named port of destination)
This term is broadly similar to the CFR term, with the exception that the seller is required to obtained insurance for the goods while in transit to the named port of destination.