The Smart Shipper's Guide to Incoterms
The Incoterms or International Commercial Terms, published by the International Chamber of Commerce (ICC) are a series of three-letter trade terms, commonly used in international commercial and/or procurement transactions. In some cases, misunderstanding of this lingo could cost you millions of unexpected dollars. Here is a quick guide to getting you on track with Incoterms.
“I know it's important, I just didn't know I needed to understand it.” This was recently said by a frustrated customer, who agreed to take on liability of a shipment sooner than intended, and in his case it lead to the most stressful 3 weeks of his career.
What does "Incoterms" mean?
The Incoterm rules are intended primarily to designate the actions, costs, and risks associated with the transportation and delivery of goods, but in short hand form.
Incoterms will identify, similar to a sales contract, obligations of both parties, costs associated with the transport, and risks involved in the transport of goods from the seller to the buyer. However, Incoterms are NOT a contractual agreement between parties, nor is it governed by law. Furthermore, it does not communicate where and when titles of ownership transfer, it does not address the negotiated price of the sale of goods, the currency to be paid, nor the credit terms if applicable. It needs to be said that any trade agreement, with or without the use of Incoterms, for any dollar amount, should be accompanied by a written and signed contract.
What are the different Incoterms?
The current version of Incoterms, Incoterms 2010, defines 11 rules, 7 of which is relevant to any mode of transport, and the remaining 4 only applies to transport by water, where goods are inspected prior to loading onto the vessel.
Defined Terms of Incoterms
(Wikipedia contributors. "Incoterms." Wikipedia, 5 Jan. 2018)
Delivery
The point in the transaction where the risk of loss or damage to the goods is transferred from the seller to the buyer
Arrival
The point named in the Incoterm to which carriage has been paid
Free
Seller has an obligation to deliver the goods to a named place for transfer to a carrier
Carrier
Any person who, in a contract of carriage, undertakes to perform or to procure the performance of transport by rail, road, air, sea, inland waterway or by a combination of such modes
Freight Forwarder
A firm that makes or assists in the making of shipping arrangements;
Terminal
Any place, whether covered or not, such as a dock, warehouse, container yard or road, rail or air cargo terminal
To clear for export
To file Shipper’s Export Declaration and get export permit
7 Incoterms which can be used for any transport
(International Chamber of Commerce) https://iccwbo.org/resources-for-business/incoterms-rules/incoterms-rules-2010/
EXW Ex Works
“Ex Works” means that the seller delivers when it places the goods at the disposal of the buyer at the seller’s premises or at another named place (i.e.,works, factory, warehouse, etc.). The seller does not need to load the goods on any collecting vehicle, nor does it need to clear the goods for export, where such clearance is applicable
FCA Free Carrier
“Free Carrier” means that the seller delivers the goods to the carrier or another person nominated by the buyer at the seller’s premises or another named place. The parties are well advised to specify as clearly as possible the point within the named place of delivery, as the risk passes to the buyer at that point.
CPT Carriage Paid To
“Carriage Paid To” means that the seller delivers the goods to the carrier or another person nominated by the seller at an agreed place (if any such place is agreed between parties) and that the seller must contract for and pay the costs of carriage necessary to bring the goods to the named place of destination.
CIP Carriage And Insurance Paid To
“Carriage and Insurance Paid to” means that the seller delivers the goods to the carrier or another person nominated by the seller at an agreed place (if any such place is agreed between parties) and that the seller must contract for and pay the costs of carriage necessary to bring the goods to the named place of destination.
The seller also contracts for insurance cover against the buyer’s risk of loss of or damage to the goods during the carriage. The buyer should note that under CIP the seller is required to obtain insurance only on minimum cover. Should the buyer wish to have more insurance protection, it will need either to agree as much expressly with the seller or to make its own extra insurance arrangements.”
DAT Delivered At Terminal
“Delivered at Terminal” means that the seller delivers when the goods, once unloaded from the arriving means of transport, are placed at the disposal of the buyer at a named terminal at the named port or place of destination. “Terminal” includes a place, whether covered or not, such as a quay, warehouse, container yard or road, rail or air cargo terminal. The seller bears all risks involved in bringing the goods to and unloading them at the terminal at the named port or place of destination.
DAP Delivered At Place
“Delivered at Place” means that the seller delivers when the goods are placed at the disposal of the buyer on the arriving means of transport ready for unloading at the named place of destination. The seller bears all risks involved in bringing the goods to the named place.
DDP Delivered Duty Paid
“Delivered Duty Paid” means that the seller delivers the goods when the goods are placed at the disposal of the buyer, cleared for import on the arriving means of transport ready for unloading at the named place of destination. The seller bears all the costs and risks involved in bringing the goods to the place of destination and has an obligation to clear the goods not only for export but also for import, to pay any duty for both export and import and to carry out all customs formalities.
4 Incoterms for Transport by Water:
FAS Free Alongside Ship
“Free Alongside Ship” means that the seller delivers when the goods are placed alongside the vessel (e.g., on a quay or a barge) nominated by the buyer at the named port of shipment. The risk of loss of or damage to the goods passes when the goods are alongside the ship, and the buyer bears all costs from that moment onwards.
FOB Free On Board
“Free On Board” means that the seller delivers the goods on board the vessel nominated by the buyer at the named port of shipment or procures the goods already so delivered. The risk of loss of or damage to the goods passes when the goods are on board the vessel, and the buyer bears all costs from that moment onwards.
CFR Cost and Freight
“Cost and Freight” means that the seller delivers the goods on board the vessel or procures the goods already so delivered. The risk of loss of or damage to the goods passes when the goods are on board the vessel. the seller must contract for and pay the costs and freight necessary to bring the goods to the named port of destination.
CIF Cost, Insurance and Freight
“Cost, Insurance and Freight” means that the seller delivers the goods on board the vessel or procures the goods already so delivered. The risk of loss of or damage to the goods passes when the goods are on board the vessel. The seller must contract for and pay the costs and freight necessary to bring the goods to the named port of destination.
‘The seller also contracts for insurance cover against the buyer’s risk of loss of or damage to the goods during the carriage. The buyer should note that under CIF the seller is required to obtain insurance only on minimum cover. Should the buyer wish to have more insurance protection, it will need either to agree as much expressly with the seller or to make its own extra insurance arrangements.”
Why are incoterms important?
Incoterm rules are a widely used process in international commercial trade. The intention is to reduce or remove the ambiguity or different interpretation of trade practices in different parts of the world. In fact, incoterm rules are accepted by governments, legal authorities, and businesses worldwide. And in an industry where strong personal relationships can mean the difference, speaking the language, both native in country and in trade, is as valuable as cold hard cash.
Where can I learn more about Incoterms?
General information about Incoterms can be found on the International Chamber of Commerce website. However, if you have specific questions, such as which incoterms would be best applicable to your shipment of goods, it’s best to contact an industry professional. Contamar has been in business since 1968 and works in incoterms on a daily basis. The most important part of any shipment is the documentation and any mistakes could signal millions of dollars in loss. Trust your documentation, especially Letters of Credit the guarantee of payment, to the experts like Contamar. Give us a call to learn how we can help make your next shipment, hassle free.
For additional information on areas of logistics that could cost your company unplanned expenses, check out our recent article Things I Wish I Knew Sooner About Exporting: Hidden Costs.