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03 November 2021

Incoterms Explained

incoterms

Incoterms (International Commercial Terms) are a set of trade rules issued by the International Chamber of Commerce to define the responsibilities of sellers and buyers globally to reduce confusion in cross-border trade.

Incoterms are 11 internationally recognised rules that define things like who is responsible for managing shipment and who is responsible for customs clearance. The aim is to enable smooth trade and transactions.

This article will provide an explainer of the 11 Incoterms.

Incoterms for Any Mode of Transport

There are seven Incoterms for Any Mode of Transport:

  • EXW (Ex Works)- This Incoterm makes export clearance the responsibility of the buyer, except when the country overrules it by law (such as the U.S.).
  • FCA (Free Carrier)- The seller is responsible for making the goods available at its own premises or at a named place. The seller is responsible for export clearance and security.
  • CPT (Carriage Paid To)- The seller clears goods for transport and delivers them for shipment, assuming responsibility for delivery to the named destination.
  • CIP (Carriage and Insurance Paid To)- The seller is responsible for delivery and insurance of delivery, after which risk transfers to the buyer.
  • DAP (Delivered at Place)- The seller bears all risks associated with delivery but not unloading.
  • DPU (Delivered at Place Unloaded)- The seller bears all risks associated with delivery and unloading.
  • DDP (Delivered Duty Paid)- The seller bears all risks associated with customs duty and delivery, as well as unloading.

Incoterms for Sea and Inland Waterway Transport

There are four Incoterms for Sea and Inland Waterway Transport:

  • FAS (Free Alongside Ship)- The seller clears goods for export and delivers them for shipment alongside the vessel, after which the buyer assumes responsibility.
  • FOB (Free on Board)- The seller clears goods for export and delivers them for shipment on the vessel, after which the buyer assumes responsibility.
  • CFR (Cost and Freight)- The seller clears goods for export and assumes responsibility up until the goods are loaded on the vessel.
  • CIF (Cost, Insurance and Freight)- The seller clears goods for export and bears the cost of freight and insurance. Buyer assumes responsibility for unloading.

Understanding Incoterms 

Incoterms are designed to clearly define who is responsible for goods at different points of importation and exportation.

When explicitly incorporated by parties into a sales contract, Incoterms become a legally enforceable part of that sales contract.

In each Incoterm, a statement is provided for the seller’s responsibility to provide goods and a commercial invoice. A corresponding statement stipulates that the buyer pay the price of goods as provided in the contract of sale.

The limitation with Incoterms is they do not address all conditions of a sale, and they do not address liability or dispute resolution. Instead, they are a framework that importers and exporters can use to ensure smooth transactions.

To find out more about Incoterms, the ICC has an explainer article, or you can download the ICC’s free eBook for a detailed guide.

Tags: incoterms trade rules cross-border trade internationally recognized rules customs clearance exw fca cpt cip dap dpu ddp fas fob cfr cif importation exportation.


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