What are Incoterms?
Incoterms or International commercial terms are the universally accepted trade rules introduced by the International Chamber of Commerce to facilitate global trade and commerce. The primary purpose of Incoterms is to avoid confusion in international trade contracts by clearly defining the responsibilities of buyers and sellers globally. Therefore, Incoterms set a standard way of communicating and understanding the exact terms of business contracts accepted by all nations despite differences in languages, policies, or governments. Incoterms are an essential part of many activities in the supply chain. These include filling out a purchase order, labeling the cargo for transportation, completing the certificate of origin (COO), etc.
The International Chamber of Commerce
The International Chamber of Commerce was founded in 1919 with the sole purpose of facilitating international trade. Due to different practices, policies, and varied legal interpretations between global buyers and sellers, there was a need for a standard set of guidelines for the ease of doing business. ICC came up with the first publication of Incoterms in 1936 and has been revising them depending on global business dynamics. The latest edition of Incoterms was published in 2020.
What are Incoterms 2020?
The 11 Incoterms define buyers’ and sellers’ responsibilities for the sale of goods internationally. Each of these terms specifies the tasks, costs, and liabilities borne by both the buyers and sellers while importing or exporting goods. Therefore, for any business, correctly knowing your Incoterms means smoother business transactions and no ambiguity in understanding individual responsibilities and liabilities in case of any mishap.
The Incoterms 2020 are an updated version of the previous version and can be classified into two groups based on the transportation mode. We have seven different Incoterms for any mode of transport, and for sea or inland waterways, we have four different Incoterms.
For Any Mode of Transport
- EXW – Ex Works (insert place of delivery)
Ex-works states that a seller is responsible for making the goods available for pickup at his facility or another specified location as per the contract. In this case, the buyer is responsible for the pickup of the goods, transportation costs and assumes all risks of moving the goods from origin to destination. The buyer undertakes all transportation activities, like loading the goods on trucks or the ship or airplane and completing the customs formalities. The incoterm is a more seller-friendly option as the seller is only required to pack, label the goods and make them available at an agreed-upon location as per the contract terms.
- FCA – Free Carrier (Insert named place of delivery)
FCA stands for Free Carrier, which essentially means that a seller is responsible for delivering the goods to a destination specified by the buyer, which can be an airport, port, warehouse, or other specified location. The seller quotes a price inclusive of the transportation costs and bears the risk of loss till goods are transferred to the carrier. Once delivered to the carrier, the buyer is responsible for the cargo, and the seller’s liability transfers to the buyer. One must note here that the seller is only responsible for delivering the goods to an agreed specified location but is not obligated to unload the goods. Additionally, the seller is responsible for the export formalities and licenses.
- CPT – Carriage Paid to (insert place of destination)
CPT, or Carriage Paid to, means that a seller is responsible for delivering the cargo to the carrier or a person nominated by the seller. The seller here pays the transportation costs incurred from his facility to the carrier destination. The seller is responsible for all risks, including loss, until the goods are under the nominated party’s supervision. The incoterm applies to all modes of transport, and in the case of multiple modes involved, the risks and the costs transfer to the buyer upon delivery to the first carrier. The seller may include the Terminal Handling Charges in the freight rates. The seller is also responsible for clearing the goods for export.
- CIP – Carriage and Insurance Paid To (insert place of destination)
As the name suggests, Carriage and Insurance Paid To is when a seller is responsible for paying the freight charges and insurance to ensure the delivery of goods to the buyer at an agreed-upon location. The liability and risk of damage of the shipment transfer to the buyer when the cargo is delivered to the carrier or a buyer nominated person responsible for carriage. In CIP, along with the freight, the seller pays for the insurance of the goods in transit for 110% of the contract value. Additionally, the buyer can demand extra coverage, and the seller will have to oblige and pay for the same. The incoterm CIP must be accompanied by a destination’s name, which means that the seller essentially pays the freight and insurance till the named location.
- DAP – Delivered at Place (insert named place of destination)
Delivered-at-place means a seller is liable to pay all the costs and incur any potential losses arising due to the movement of the goods from the origin to the destination. The buyer assumes the responsibility of paying for import duties, local taxes, and customs clearance once the shipment arrives at the specific location mentioned in the contract. The incoterm essentially transfers a significant amount of risk and costs to the seller. It holds him/her responsible for every activity, including packaging, documentation, export formalities, paying for loading, and the final delivery. The buyer, on the other hand, only pays for unloading the shipment and import related formalities. The DAP incoterm must be accompanied by the name of the predetermined location of delivery.
- DPU – Delivered at Place Unloaded (insert of the place of destination)
DPU or Delivered at Place Unloaded is the newest addition to the list of Incoterms 2020. DPU is also referred to simply as a change in the name of the previous Incoterm DAT or Delivered at Terminal. This is the only Incoterm that holds the seller responsible for unloading the goods. DPU is also followed by the name of an agreed-upon location, which can be a transport hub, a warehouse, or a buyer’s depot. The seller is responsible for the payment of carriage, delivery of the goods, and the unloading at the named place. The risk transfer to the buyer occurs only once the shipment has been unloaded. The buyer is solely responsible for import clearance and pays for import duties and any local taxes.
- DDP – Delivered Duty Paid (Insert place of destination).
DDP or Delivered Duty Paid means that the seller is responsible for all the risk and transportation costs for moving the goods from origin to the destination where the buyer receives the shipment. Therefore, the seller pays for shipping costs, export and import duties, insurance, and any additional expense arising during the transit to a specified location as per the contract in the buyer’s country. This entails that the seller is liable to pay for or be held responsible for bribery, paying VAT charges, and additional storage costs in case of unprecedented delays. DDP is a more buyer-friendly incoterm and places an exceptionally high amount of responsibility on the seller.
For Sea and Inland Waterway Transport are:
- FAS – Free Alongside Ship (insert name of the port of loading)
Free Alongside Ship means that the seller is responsible for arranging the delivery of the cargo next to a particular vessel at a specific port to be loaded on it. The word ” free ” means that the seller is obligated to deliver the goods to a specified location, which is beside a vessel that the goods are supposed to be loaded. The seller is generally responsible for export clearance while the buyer pays for loading the goods onto the ship, ocean freight, and insurance.
- FOB – Free on Board (insert named port of loading)
Free on Board means that the seller is responsible for delivering the cargo on board the vessel nominated by the buyer at the decided port of loading. The risk of any loss or damage of the shipment is transferred from the seller to the buyer when the goods are loaded on board the vessel. The buyer assumes all responsibilities and costs associated with the movement thereon. Therefore, the seller bears the costs of transportation of the goods from his facility to the port of loading and is responsible for any loss or damage occurring during the initial leg of the journey only till the port of loading. On the other hand, the buyer pays for ocean freight and is liable for any loss or damage that happens en-route. The seller arranges the export clearance, and the buyer arranges for all import formalities.
- CFR – Cost and Freight (insert named port of destination)
CFR stands for Cost and Freight and states that the seller is obligated to arrange the carriage by sea to an agreed seaport of destination, pay for the freight and also complete the documentation required for the buyer to receive the goods at the destination. However, CFR doesn’t require the seller to purchase marine insurance against the risk of damage or loss of the shipment while in transit.
- CIF – Cost Insurance and Freight (insert named port of destination)
CIF or Cost Insurance Freight means that the seller is responsible for paying the costs, insurance, and freight for a shipment in transit. A named port of destination essentially follows the Incoterm. Until loading the goods on the vessel, the seller is liable to pay for any loss or damage to the shipment. The seller must also arrange and pay for any additional customs duties, export documentation, inspections, etc. However, once the freight loads onto the vessel, the buyer becomes responsible for all costs. Therefore, once the liability transfers, the buyer is obligated to pay for additional inspection, licensing fees, customs duties, taxes, and pay for the final leg of the journey to the destination.
Incoterms play a vital role in international trade and commerce and clearly determine the buyer and seller’s obligations, liabilities, and costs associated with a contract. They are the universal language that is understood by all and helps avoid confusion in international trade agreements. Incoterms reduce risk by removing the inconsistencies arising due to different geographical rules, regulations, or languages. Failure to use the correct Incoterms can have a severe impact on businesses. It can affect the payment of goods, cause delivery delays, disrupt inventory control, and cause poor customer experience. Therefore, Incoterms play a significant role in ensuring a standardized flow of operations in international trade.