What are Incoterms and what are they used for?
International Commercial Terms or Incoterms as they are more commonly known as are rules that govern international trade. First coined in 1936 by the International Chamber of Commerce (ICC) these terms clearly define the risk, cost and responsibility for both the buyer and seller during the transportation of the cargo from the exporter to the importer. These universally recognised terms are also used internationally to settle trade disputes between sellers and buyers. Having being revised since it was first launched, the latest version that buyers and sellers currently refer to is the 8th version which was released on January 1st, 2011. Originally designated ‘Incoterms 2010′ the revised rules have brought about a reduction in the number of terms from 13 to 11.
What are Incoterms not used for?
Incoterms do not:
- Form a contract
- Repudiate the law governing the contract
- Define where title transfers nor
- Address the price payable, currency or credit terms.
Outlining the 11 Incoterms
The Incoterms are currently classified into two groups:
Terms for any transport mode:
- EXW – Ex Works (named place of delivery) - The sole responsibility of the seller is to make the goods available at the seller’s premises. Full cost and risk of moving goods from there to the destination is the buyer’s responsibility.
- FCA – Free Carrier (named place of delivery) - The seller has to deliver the goods which have been cleared for export to the carrier stipulated by the buyer or another party authorised to pick up goods. From that point, buyer assumes all the costs and risk associated with moving the goods to the destination.
- CPT – Carriage Paid to (named place of destination) - Seller has to pay for moving the export cleared goods to the carrier stipulated by the buyer. After the goods are transferred to the first carrier, the risk of loss or damage becomes the responsibility of the buyer.
- CIP – Carriage and Insurace Paid to (named place of destination) - Similar to the CPT the seller has to bear the cost of transporting the export cleared goods to the carrier stipulated by the buyer. The risk of damage or loss post the transfer of goods to the first carrier is then assumed by the buyer. The only difference here is that the seller has to also procure minimum insurance coverage.
- DAT – Delivered at Terminal (named terminal at port or place of destination) - Seller has to clear the goods for export and bear all the risks and cost associated with delivering and unloading them at a named terminal at the named port or place of destination. Clearing cost and risks from this point onwards including clearing the goods for import is the responsibility of the buyer.
- DAP – Delivered at Place (named place of destination) - Seller is expected to assume the cost and risk associated with delivering the goods ready to be unloaded at a stipulated destination. All the risks and cost tied up with unloading the goods and clearing the customs to import the goods at the named country of destination is the buyer’s responsibility.
- DDP – Delivered Duty Paid (named place) - Risk and cost connected with delivering the goods to the named place of destination ready for unloading and cleared for imports is the responsibility of the seller.
Terms for Maritime only:
- FAS – Free Alongside Ship (named port of shipment) - The seller only has to deliver the goods to the origin port. Buyer bears all costs and risks of loss or damage from that point.
- FOB – Free on Board (named port of shipment) - Delivery of goods on board the ship and clearing the goods for export is the onus of the seller. Post that, the buyer assumes all costs and risks of loss or damage.
- CFR – Cost and freight (named port of destination) - Seller has to clear the goods for export as well as bear the costs of moving the goods to the destination. Buyer bears all risks for goods from the time the goods have been delivered on board the vessel at the port of shipment.
- CIF – Cost Insurance and Fright (named port of destination) - Here again, the seller is expected to clear the goods for export and pay the cost of moving the goods to the destination. Post that, the buyer has to bear all risks of loss or damage and the cost associated with unloading the goods and clearing them for import. The seller, however, has to purchase the cargo insurance.