Skip to main content

INCOTERMS

Understanding Incoterms: A Comprehensive Guide

These notes provide a detailed overview of Incoterms, their necessity, groups, and specific examples of key terms, along with filling in missing details.

What are Incoterms?

  • Definition: Incoterms (International Commercial Terms) are a standardized set of international trade terms that define the responsibilities and obligations of buyers and sellers in international commercial transactions. They are globally recognized and published by the International Chamber of Commerce (ICC).
  • Purpose: Incoterms clarify the roles of each party, specifically regarding:
    • Delivery of Goods: Where and when the seller's responsibility for the goods ends and the buyer's begins.
    • Transfer of Risk: Who bears the risk of loss or damage to the goods at each stage of the shipping process.
    • Cost Allocation: Which party is responsible for transportation, insurance, and other costs.
  • Scope: Incoterms deal only with the relation between sellers and buyers under the contract of sale, not the contract of carriage or insurance.
  • Revision: Incoterms are revised approximately every 10 years by the ICC to keep up with changing trade practices, the latest being Incoterms 2020. When using Incoterms, it's essential to specify the edition (e.g., "Incoterms 2020").

Need for Incoterms

Incoterms are crucial for several reasons:

  1. Clarity and Consistency: They provide a common language for international trade, reducing misunderstandings and disputes between buyers and sellers from different countries.
  2. Risk Management: By clearly defining when and where the risk of loss or damage transfers from seller to buyer, Incoterms help parties secure appropriate insurance coverage.
  3. Cost Allocation: Incoterms clearly specify who pays for transport, insurance, customs clearance, and other associated costs, preventing unexpected expenses.
  4. Legal Framework: They provide a basis for legal contracts, ensuring that both parties understand their obligations and liabilities.
  5. Facilitates Trade: By standardizing processes, Incoterms help international trade flow smoothly, reducing delays and complications.

Structure of Incoterms: The Four Groups

Incoterms are organized into four main groups, based on the level of responsibility placed on the seller:

  • E-Terms (Departure): The seller's obligation is minimal; the buyer assumes most responsibilities.
    • Example: Ex Works (EXW)
  • F-Terms (Main Carriage Unpaid): The seller is responsible for delivering the goods to a carrier appointed by the buyer.
    • Examples: Free Carrier (FCA), Free Alongside Ship (FAS), Free on Board (FOB)
  • C-Terms (Main Carriage Paid): The seller pays for transport to the destination but doesn't bear the risk of loss or damage after shipment.
    • Examples: Cost and Freight (CFR), Cost, Insurance, and Freight (CIF), Carriage Paid To (CPT), Carriage and Insurance Paid To (CIP)
  • D-Terms (Arrival): The seller bears all costs and risks to deliver the goods to the destination.
    • Examples: Delivered at Place (DAP), Delivered Duty Paid (DDP)

Specific Incoterms Explained

Here's a breakdown of some key Incoterms, including those listed in the prompt:

1. EXW - Ex Works (named place)

  • Seller's Responsibility: The seller's responsibility ends when the goods are made available to the buyer at the seller's premises or another named place.
  • Buyer's Responsibility: The buyer is responsible for all costs and risks involved in loading the goods onto transport, arranging transportation, handling export and import clearances, and delivering the goods to their final destination.
  • Risk Transfer: The risk transfers from the seller to the buyer when the goods are made available at the named place.
  • Example: A manufacturer in China makes goods available at their factory gate. The buyer is responsible for everything from loading the goods onto a truck to getting them to their final destination, including customs clearance.
  • Minimum Obligation for Seller: This term represents the minimum obligation for the seller.
  • Practical Use: Commonly used when the buyer is experienced in international logistics and wants to control all aspects of shipping.

2. FAS - Free Alongside Ship (named port of shipment)

  • Seller's Responsibility: The seller is responsible for delivering the goods alongside the vessel at the named port of shipment.
  • Buyer's Responsibility: The buyer bears all costs and risks of loss or damage from the moment the goods are alongside the ship. The buyer is also responsible for loading goods onto the ship and arranging for carriage and import formalities.
  • Risk Transfer: The risk transfers from the seller to the buyer once the goods are placed alongside the ship at the named port of shipment.
  • Applicable Transport: This term is only used for sea or inland waterway transport.
  • Example: A seller delivers goods to the dock next to the ship. The buyer then takes over responsibility for loading, shipping, and importing the goods.
  • Limited to Sea and Inland Waterways: This incoterm is solely for sea or inland waterway transport.

3. FOB - Free on Board (named port of shipment)

  • Seller's Responsibility: The seller is responsible for delivering the goods on board the vessel at the named port of shipment. This includes customs clearance for export.
  • Buyer's Responsibility: The buyer bears all costs and risks of loss or damage once the goods have passed the ship's rail (are on board). The buyer is also responsible for the main carriage, import formalities, and delivery to final destination.
  • Risk Transfer: The risk transfers from seller to buyer when the goods pass the ship's rail at the named port of shipment.
  • Applicable Transport: This term is used for sea or inland waterway transport.
  • Example: An exporter in Mumbai loads goods onto a ship. Once the goods have crossed the ship's rail, the buyer assumes all risks and costs for transportation to its final destination.
  • Commonly Used Term: Often used for bulk shipments like raw materials.

4. CFR - Cost and Freight (named port of destination)

  • Seller's Responsibility: The seller pays for the costs and freight necessary to bring the goods to the named port of destination. The seller is also responsible for export customs clearance.
  • Buyer's Responsibility: The buyer takes the risk of loss or damage to the goods once they have been loaded on board at the port of shipment. The buyer is also responsible for import clearance and for any onward transport beyond the port of destination.
  • Risk Transfer: The risk transfers from seller to buyer when the goods pass the ship's rail at the port of shipment.
  • Applicable Transport: This term is used only for sea or inland waterway transport.
  • Example: A seller arranges for shipping and pays to get goods to a port in another country. The buyer takes over the risk once the goods are loaded on the vessel at the port of origin.
  • Seller Arranges Main Carriage: This incoterm requires the seller to arrange for carriage of goods.

5. CIF - Cost, Insurance, and Freight (named port of destination)

  • Seller's Responsibility: The seller has the same obligations as CFR but also has to procure and pay for marine insurance to cover the buyer's risk of loss or damage during transit. The seller pays the costs and freight, arranges for insurance and is also responsible for export customs clearance.
  • Buyer's Responsibility: The buyer is responsible for all costs and risks once the goods have passed the ship's rail at the port of shipment, and for import formalities and any onward transport beyond the port of destination.
  • Risk Transfer: The risk transfers from the seller to the buyer when the goods pass the ship’s rail at the port of shipment.
  • Applicable Transport: This term is used for sea or inland waterway transport.
  • Example: A seller pays to ship goods to a port, arranges for and pays for insurance. The buyer's risk begins once the goods are loaded on the vessel. The buyer is responsible for all subsequent costs, import clearance and transport from the port to its final destination.
  • Seller Arranges Insurance: CIF requires the seller to also arrange for insurance in addition to carriage of goods.

Key Considerations when Using Incoterms

  • Specify the Edition: Always state which version of Incoterms (e.g., Incoterms 2020) applies in your contract.
  • Named Place: Clearly state the specific location (city, port, etc.) in each Incoterm, as this determines the place of delivery.
  • Insurance: In CIF and CIP, ensure that the level of insurance is adequate to cover the value of the goods and that the beneficiary is correctly named.
  • Contract of Sale: Incoterms are part of the sales contract and should be aligned with the other terms of the agreement.
  • Legal Advice: When in doubt, seek legal advice to ensure that the chosen Incoterm is appropriate for your particular transaction.

Conclusion

Incoterms provide essential clarity and structure to international trade transactions. Understanding the obligations and responsibilities outlined in each Incoterm is critical for successful and trouble-free global trade. By carefully selecting the appropriate Incoterm, both buyers and sellers can protect their interests and facilitate smooth cross-border trade.

Back to top