What are incoterms and why are they important.
Incoterms (International Commercial Terms) define the role the buyer and seller play in an international transaction. The terms determine the duties of both the seller and the buyer; it dictates who is responsible for the insurance, licences, permissions and other formalities including who arranges transport. It also indicates the point the risk transfers from the seller to the buyer.
Incoterms help reduce the risk of misunderstandings which could end up being costly. Since 2010 there are 11 incoterms.
The 11 Incoterms
EXW – Ex-Works
Includes all transport modes.
The buyer assumes most of the risk and cost throughout the transaction as the seller only needs to place the goods at the disposal of the buyer, where after the buyer must arrange for export and import as well as insurance and all other formalities. If the seller were to load the goods, even though he has no obligation to do so, it would still be at the buyers own risk.
FCA – Free Carrier
Includes all transport modes.
In this case the seller delivers the goods to the carrier chosen by the buyer at the named place. The goods need to be cleared for export by the time it is passed on to the carrier. Once the seller delivers these goods, the risk is passed on.
FAS – Free Alongside Ship
Restricted to sea or inland waterway transport.
The seller needs to deliver the goods, cleared for export, alongside the vessel. Once the seller has done this, the risk transfers to the buyer who is responsible for loading the goods as well as any other costs or risks involved afterwards.
FOB – Free On Board
Restricted to sea or inland waterway transport.
The seller does not only need to deliver the goods, cleared for export, but is also responsible for loading the goods onto the vessel. Once the seller has loaded the goods, the risk transfers to the buyer.
CFR – Cost and Freight
Restricted to sea or inland waterway transport.
The seller is responsible for delivering and loading of goods onboard the vessel, which he arranged and paid for. Although the seller pays for the transport the risk still falls on the buyer as soon at it is loaded.
CIF – Cost Insurance Freight
Restricted to sea or inland waterway transport.
The seller once again arranges and pays for transport and is responsible for loading the goods onto the vessel, cleared for export. He is also in charge of arranging and paying for insurance for the carriage to the named port. The rule does only require a minimum cover therefore it is advised to address the level of cover elsewhere in the commercial agreement. The risk falls on the buyer as soon as the goods have been loaded.
CPT – Carriage Paid To
Includes all transport modes
The seller is responsible for arranging the carriage of the goods to the named place but the seller does not need to insure the goods. The risk transfers from seller to buyer as soon as the goods are taken in charge by a carrier, regardless of how delivery takes place.
Keep a lookout for THC (terminal handling charges) as they may not be included in the carrier freight rates.
CIP – Carriage Insurance Paid To
Includes all transport modes.
The seller arranges for carriage as well as insurance of the goods. The risk still transfers to the buyer when the goods are taken charge by the carrier.
Keep a lookout for THC (terminal handling charges) as they may not be included in the carrier freight rates.
DDP – Delivered Duty Paid
Includes all transport modes.
The seller is responsible for arranging the carriage and delivery of the goods at the named place. The goods should be cleared for import and all applicable taxes and duties should be paid. The risk transfers to the buyer once the goods are made available to him.
This rule places most of the responsibilities on the seller and is the only rule where the seller is responsible for ensuring import clearance and paying of those fees .This places the seller at risk as import into a foreign country can often take longer and end up being more complex
DAT – Delivered At Terminal
Includes all transport modes.
The seller is responsible for arranging the carriage and delivering the goods, unloaded, at the named place. Risk transfers to the buyer once the goods have been unloaded. The buyer is still responsible for import clearance and any applicable taxes or costs.
DAP – Delivered At Place
Includes all transport modes.
The seller is responsible for arranging carriage and delivering of the goods ready to be unloaded. The risk transfers to the buyer once the goods are available to unload. Unloading takes place at buyers own risk. The buyer is responsible for import clearance including costs related to it.
Always make sure the named place is clearly stipulated and as precise as possible to avoid confusion in large shipping yards. Go over things like risk and insurance to ensure both the buyer and seller are aware of when the risk transfers to and from them. For many of these rules insurance is not a must; however it is advised that you still have that in place.
We hope this gave you more insight into incoterms, if you have any more questions or need our help. Feel free to contact us.