International commercial terms - INCOTERMS
INCOTERMS (International Commercial Terms) are a set of trade term definitions developed by the International Chamber of Commerce (ICC) and recognised internationally.
- Know your INCOTERMS and you’ll know your responsibilities.
- Sometimes buyers take on the responsibilities (e.g. with DAP)
- At other times, sellers have the responsibilities (e.g. with DDP)
- Always identify the port of shipment precisely.
INCOTERMS - the language you’ll need when you’re trading abroad.
INCOTERMS (International Commercial Terms) are an internationally recognised set of trade term definitions developed by the International Chamber of Commerce (ICC). The terms define the trade contract responsibilities and liabilities between a buyer and a seller. They cover who is responsible for paying freight costs, insuring goods in transit and covering any import/export duties, for example. They are invaluable as, once importer and exporter have agreed on an INCOTERM, they can trade without discussing responsibilities for the costs and risks covered by the term.
Commonly used INCOTERMS
Full details of all the INCOTERMS and their definitions are available from the International Chamber of Commerce.
EXW - Ex Works
The seller makes the goods available at his or her premises. The buyer is responsible for uploading. This applies to any mode of transport, but should only be used for domestic transactions, because the seller has only to 'provide the buyer'... assistance in obtaining any export licence, or other official authorization'. The seller also has no obligation to load the goods. In addition the buyer has limited obligations to provide the seller with proof of export. For international trade, FCA, below, is more appropriate.
FCA - Free Carrier
The seller must 'deliver the goods to the carrier ... nominated by the buyer ... at the named place'. This term is suited for international sales with minimum obligations for the seller. Its advantage over EXW is that the seller is responsible for any export licensing and Customs export clearance, which eases the problem of proof of export, and the seller must load the goods (which is usually the case). There is a new focus on 'FCA ... seller's premises' as the appropriate term for international sales when the seller wants to limit their obligations to the loading of the goods and export clearance.
Carriage Paid To (... named place of destination). The seller pays for carriage. This term is used for all kinds of shipments. Risk is transferred from the seller to the buyer upon handing over of the goods to the first carrier at the place of shipment in the country of export.
Carriage and Insurance Paid (...named place of destination) - any mode of transport. The seller must 'deliver to the first carrier at the named place'. It’s strongly recommended that the parties define the place of delivery (in the seller's country) as well as the place of destination (in the buyer's country) due to the fact that risk passes to the buyer at the named place of delivery in the seller's country.
'When CPT or CIP terms are used, the seller fulfills their obligation to deliver when it hands the goods over to the carrier, and not when the goods reach the place of destination.' So these are ' shipment contracts' not ' arrival contracts'. Therefore, it is strongly recommended that the place of delivery, in the seller's country, is identified as precisely as possible in the contract.
Delivered at Terminal (...named terminal at destination).
The seller pays for carriage to a nominated ‘terminal’ or ‘point’, except for costs related to import clearance. The seller also assumes all risks up to the point that the goods are unloaded at the terminal.
DAP would be inappropriate in these circumstances as the seller has only to place the goods 'ready for unloading'.
Delivered At Place (...named place of destination). This is appropriate to both domestic and international sales.
The seller delivers when 'the goods are placed at the disposal of the buyer ready for unloading by the buyer ... at the named place'. All import Customs formalities and costs are the responsibility of the buyer.
Delivered Duty Paid (...named place of destination). This applies to any mode of transport.
The seller must deliver the goods to the buyer, cleared for import, and not unloaded at the named place of destination.
These are only used for conventional sea or inland waterway transport.
- FAS - Free Alongside Ship (...named port of shipment). If the goods are containerised, use the FCA term.
- FOB - Free On Board (...named port of shipment). The seller must deliver the goods by 'placing them on board the vessel ... at the loading point'. The FCA term should be used where the goods are handed over to the carrier before they are on board the vessel - goods in containers, for example.
- CFR - Cost and Freight (...named port of destination).
- CIF - Cost Insurance and Freight (...named port of destination).
The seller must deliver the goods by 'placing them on board the vessel'. Where the goods are handed over to the carrier before they are on board the vessel - goods in containers, for example, the CPT or CIP term should be used.
When CFR or CIF terms are used, the seller fulfills its obligation to deliver when it hands the goods over to the carrier and not when the goods reach the place of destination. So it’s important that the port of shipment is identified as precisely as possible in the contract.