International Commercial Terms (Incoterms) are a series of pre-defined three letter trade terms published by the International chamber of Commerce (ICC) to clearly communicate tasks, costs and risks associated with the transportation and delivery of goods. The ICC released Incoterms 2010, an updated version, in January of 2011. An explanation of the terms and a quick reference chart follow.
Rules for any Mode(s) of Transport:
The following seven rules defined by Incoterms 2010 apply to any mode of transportation:
EXW- Ex Works – (named place of delivery)
This term places the maximum obligation on the buyer. The seller has only to make the goods available at its premises. The buyer pays all costs pertaining to export and transportation and assumes all the risk of getting the goods to the final destination. If the seller loads, it does so at the buyer’s cost and risk.
FCA – Free Carrier – (named place of delivery)
The seller delivers the goods, cleared for export, to the first carrier of the buyer’s choosing at the named place of delivery. The seller is responsible for transportation to the place of delivery. The buyer is responsible for carriage. The buyer’s risk begins when the goods are handed over to the first carrier.
CPT – Carriage Paid To - (named place of destination)
The seller delivers the goods, cleared for export, to the carrier of its choice and pays for carriage to a named place of destination. The buyer’s risk begins when the goods are handed to the carrier.
CIP - Carriage and Insurance Paid to -(named place of destination)
The seller delivers the goods, cleared for export, to the carrier of its choice and pays for carriage and insurance to a named place of destination. Risk passes from the seller when the goods are handed over to the carrier.
DAT - Delivered at Terminal -(named terminal at port or place of destination)
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. 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 -(named place of destination)
The seller delivers the goods 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 the risks involved in bringing the goods to the named place.
DDP - Delivered Duty Paid - (named place of destination)
This term places the maximum obligation onthe seller.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 destination and is obligated to pay for clearance at export and import and to pay any duties and fees for both and to carry out all customs formalities.
Rules for Sea and Inland Waterway Transport:
The following four rules defined by Incoterms 2010 apply to international trade where transportation is entirely conducted by water:
FAS - Free Alongside Ship -(named port of shipment)
The seller delivers when the goods are placed alongside the vessel (i.e. on a barge) nominated by the buyer at the port of shipment. The risk of loss or damage to the goods passes to the buyer when the goods are alongside the ship. The buyer bears all cost from that moment forward. This term does not apply to containers.
FOB - Free on Board - (named port of shipment)
The seller delivers the goods on board the vessel nominated by the buyer at the named port of shipment. The risk of loss or damage to the goods passes to the buyer when the goods are on board the vessel, and the buyer bears all costs from that moment forward.
CFR - Cost and Freight - (named port of destination)
The seller delivers the goods on board the vessel. The risk of loss or damage to the goods passes to the buyer when they are onboard the vessel. The seller must contract and pay for the costs and freight necessary to bring the goods to the named port of destination.
CIF - Cost Insurance and Freight - (named port of destination)
The seller delivers the goods on board the vessel. The risk of loss or damage to the goods passes to the buyer when they are on board the vessel.
The seller must contract and pay the costs and freight necessary to bring the goods to the named port of destination.
CRITICAL POINTS
- Be Specific:When using INCOTERMS in the Sales Contract or Purchase Order identify the appropriate rule, (e.g. FCA, CPT, etc.), state “INCOTERMS 2010” and specify the place or port as precisely as possible.
- Recognize Where the Risk of Loss Transfers: Risk passes and cost is transferred at different places depending on the INCOTERM. It is a common misconception that when the Seller pays the freight, they assume the risk of loss until the goods are delivered to the specified place or port.Know where the risk lies.
- Understand who has responsibility for loading and unloading charges:Cost is transferred at different places depending on the chosen INCOTERM. DAT obligates the seller to place the goods at the buyer’s disposal after unloading. DAP obligates the seller to place the goods on the delivering carrier ready for unloading. CPT, CIP, CFR and CIF require that the parties identify as precisely as possible the point or port at which the costs become the responsibility of the buyer.
- Understand who has responsibility for US Customs:DDP is the only INCOTERM that designates the seller as the responsible party for the US Customs entry declaration. Always clarify who is responsible for ISF filing. If the shipper is responsible, the ISF filing must be made 24hours prior to loading onto the vessel. If the buyer is responsible, the ISF filing must be made 72 hours before loading. The buyer should be indemnified against penalties for late filing.
For a comprehensive explanation of Incoterms 2010 please see ICC publication No. 715E, ISBN: 978-92-842-0080-1. It is available at ICC Business Bookstore. The web address is iccbooks.com.
