What are Incoterms and why should you know about them?
International Commerce Terms (Incoterms) are a set of 11 rules used to increase clarity and reduce conflict in the industry of global trade. If the company you work for sends shipments internationally or receives them from abroad, it is paramount that you have an understanding of the terms and why they exist.
Incoterms outline the delivery obligations between two companies, between a buyer and a seller. Insurance responsibility, the delivery of goods, payment at each stage and loading/unloading responsibility are just some of the many factors that are outlined by Incoterms.
So, why are they important? The three-letter acronyms intend to simply inform international traders of the costs, risks, tasks and responsibilities which are relevant to different stages in the supply chain; they also assuage worries about foreign companies interpreting rules incorrectly. As a result, they are frequently referenced in sales contracts within the logistics industry.
Below is a brief overview of each Incoterm:
Ex Works (EXW)
‘Ex Works’ means the seller has done their job when they make the goods available on their own premises or another named location. As a result, the seller does not need to transport the goods or make them clear for export.
Free Carrier (FCA)
‘Free Carrier’ requires the seller to pass the goods onto a carrier at the seller’s premises or another named place.
Carriage Paid To (CPT)
‘Carriage Paid To’ means the seller delivers the goods to a carrier and the seller pays the cost of transport to deliver the goods to their destination.
Carriage and Insurance Paid To (CIP)
‘Carriage and Insurance Paid To’ summaries that the seller delivers the goods to a carrier and the seller pays the cost of transport to deliver the goods. The seller also contracts for insurance to cover the risk of loss of or damage to the goods during transportation.
Delivered at Terminal (DAT)
‘Delivered at Terminal’ means it is the seller’s duty to unload the goods at the desired terminal at the named port. The seller fronts all risk involved in transporting the goods and unloading them at the port.
Delivered at Place (DAP)
‘Delivered at Place’ means it is the seller’s duty to unload the goods and see they are at the disposal of the buyer at the desired destination. The seller fronts all risk involved in transporting the goods and unloading them at their place of destination.
Delivered Duty Paid (DDP)
‘Delivered Duty Paid’ states that the seller will be responsible for the goods until they are placed at the disposal of the buyer, cleared for import and ready for unloading at their destination. The seller fronts all the costs and risk involved, along with clearing the goods for both import and export.
Free Alongside Ship (FAS)
‘Free Alongside Ship’ means the seller is accountable until the goods are placed alongside the desired vessel at the named port. The risk of loss of or damage to the goods passes onto the buyer when the goods are alongside the ship.
Free on Board (FOB)
‘Free on Board’ holds the seller accountable until the goods are placed on board the desired vessel at the named port. The buyer then pays all necessary fees to transport the goods onwards. The risk of damage to the goods passes onto the buyer when the goods are on the ship.
Cost and Freight (CFR)
Like FOB, ‘Cost and Freight’ requires the seller to deliver the goods onto the designated vessel. The risk of loss of or damage to the goods passes when the goods are on board the vessel. The seller must pay the costs as well as the freight required to bring the goods to their destination.
Cost, Insurance and Freight (CIF)
‘Cost, Insurance and Freight’ means that the goods are delivered onboard the vessel by the seller. The risk of loss or damage is transferred when the goods are onboard. The seller must pay the costs, insurance cover and freight necessary to bring the goods to their destination.
Around the globe, Courts utilise these terms which means it is much simpler to resolve legal disputes. By stipulating the duties of the buyer and seller, both parties have a better chance of creating a successful outcome in their trade dealings. Incoterms are revised by the International Chamber of Commerce (ICC) in ten-year intervals to improve international trade practice. The latest revision occurred in 2010 so we will see what amendments occur in 2020, and we will see how the future of international trade is set to unfold.
For more information on Incoterms, visit the International Chamber of Commerce website