Introduction to INCOTERMS
INCOTERMS (International Commercial Terms) are a set of standardized trade terms published by the International Chamber of Commerce (ICC) that define the responsibilities of buyers and sellers in international trade.
These rules have evolved into an essential component of the everyday language of commercial trade. They provide rules and direction to importers, exporters, lawyers, transporters, insurers, and students of international trade and have been incorporated into global contracts for the sale of goods.
Key Benefits:
- Controlled Operation Costs
- Efficient Logistics Management
- Enhanced Flexibility
- Increased Global Reach
- Optimized Working Resources
- Peace of Mind in Transactions
History of INCOTERMS
The International Chamber of Commerce came up with the idea in 1921 and put it into action in 1936. Since then, it has been updated nine times to keep up with how international business has changed.
In 1923, the ICC committee developed the initial six rules, namely FOB, FAS FOT, FOR, CIF, and C&F, which served as a precursor to the Incoterm Rules. In 1936, the International Chamber of Commerce (ICC) released the initial version of Incoterms, which are abbreviations for "International Commercial Terms."
The ICC updated Incoterms once more on January 1, 2000, to reflect the most recent developments in international trade. They should now be included in contracts that go into effect in January 2000 or later with the reference "Incoterms 2000."
1921
Initial concept developed by ICC
1936
First official version published
2020
Current version with 11 terms
Why Use Incoterms?
To Fix
The international set of rules for commonly used terms in international trade
To Define
The obligations of each party involved in an international trade transaction
To Determine
The delivery/distribution and transfer of risks between seller and buyer
Outsourcing Supply Chain
Clarify responsibilities in complex global supply chains
Key Points Fixed by Incoterms
Risk Transfer
Determine the point at which the risk of loss or damage to the goods shifts from the seller to the buyer.
Contract of Carriage
Specify which party is responsible for arranging and paying for transportation.
Allocation of Costs
Allocate costs associated with transportation, insurance, and other expenses.
Packaging & Handling
Clarify responsibilities for packaging, handling, and loading/unloading.
Export/Import Formalities
Define who handles customs clearance, duties, taxes, and documentation.
Changes from 2010 to 2020
DAT to DPU
The term DAT (Delivered at Terminal) was replaced with DPU (Delivered at Place Unloaded) to clarify that unloading can occur anywhere, not just at terminals.
Insurance Requirements
For CIP terms, the minimum insurance coverage was increased from Institute Cargo Clauses (C) to (A), providing "all risks" coverage unless otherwise agreed.
Own Transport Option
Parties can now specify if they're using their own means of transport in FCA terms.
Security Requirements
Clearer allocation of responsibilities for security-related requirements.
Incoterms Chart
Summary Chart
| Code | Term | Risk Transfer | Transport Paid By | Insurance |
|---|---|---|---|---|
| EXW | Ex Works | At seller's premises | Buyer | Buyer |
| FCA | Free Carrier | At carrier | Buyer | Buyer |
| CPT | Carriage Paid To | At destination | Seller | Buyer |
| CIP | Carriage and Insurance Paid To | At destination | Seller | Seller |
| DAP | Delivered at Place | At destination | Seller | Buyer |
| DPU | Delivered at Place Unloaded | At destination | Seller | Buyer |
| DDP | Delivered Duty Paid | At destination | Seller | Buyer |
| FAS | Free Alongside Ship | On board vessel | Buyer | Buyer |
| FOB | Free on Board | On board vessel | Buyer | Buyer |
| CFR | Cost and Freight | On board vessel | Seller | Buyer |
| CIF | Cost, Insurance & Freight | On board vessel | Seller | Seller |
Detailed Responsibilities
| Term | Loading & Transport | Export Clearance | Main Carriage | Unloading at Import | Import Formalities | Insurance |
|---|---|---|---|---|---|---|
| EXW | BUYER | BUYER | BUYER | BUYER | BUYER | NEGOTIABLE |
| FCA | SELLER | SELLER | BUYER | BUYER | BUYER | NEGOTIABLE |
| FAS | SELLER | SELLER | BUYER | BUYER | BUYER | NEGOTIABLE |
| FOB | SELLER | SELLER | BUYER | BUYER | BUYER | NEGOTIABLE |
| CFR | SELLER | SELLER | SELLER | BUYER | BUYER | NEGOTIABLE |
| CIF | SELLER | SELLER | SELLER | BUYER | BUYER | SELLER CLAUSES. (C) |
| CPT | SELLER | SELLER | SELLER | NEGOTIABLE | BUYER | NEGOTIABLE |
| CIP | SELLER | SELLER | SELLER | SELLER | BUYER | SELLER CLAUSES. (A) |
| DAP | SELLER | SELLER | SELLER | SELLER | BUYER | NEGOTIABLE |
| DPU | SELLER | SELLER | SELLER | SELLER | BUYER | NEGOTIABLE |
| DDP | SELLER | SELLER | SELLER | SELLER | SELLER | NEGOTIABLE |
EXW - Ex Works
Seller makes goods available at their premises
Seller Responsibilities
- Packaging and marking goods
- Export clearance and documentation
Buyer Responsibilities
- Contract and pay for carriage
- Obtain insurance (if desired)
- Import clearance and documentation
- Pay import duties and taxes
- Take delivery at agreed point
- Unload goods (unless EXW/FCA at seller's premises)
Important Notes:
- Seller has minimal obligations - only makes goods available at their premises
FCA - Free Carrier
Seller delivers goods to carrier or specified location
Seller Responsibilities
- Packaging and marking goods
- Export clearance and documentation
Buyer Responsibilities
- Contract and pay for carriage
- Obtain insurance (if desired)
- Import clearance and documentation
- Pay import duties and taxes
- Take delivery at agreed point
- Unload goods (unless EXW/FCA at seller's premises)
Important Notes:
- Delivery point changes based on location (seller's premises vs other location)
CPT - Carriage Paid To
Seller pays carriage to named destination, risk transfers earlier
Seller Responsibilities
- Packaging and marking goods
- Contract and pay for carriage
- Export clearance and documentation
Buyer Responsibilities
- Obtain insurance (if desired)
- Import clearance and documentation
- Pay import duties and taxes
- Take delivery at agreed point
- Unload goods (unless EXW/FCA at seller's premises)
Important Notes:
CIP - Carriage and Insurance Paid To
Like CPT but seller must also insure goods
Seller Responsibilities
- Packaging and marking goods
- Contract and pay for carriage
- Obtain insurance (SELLER CLAUSES. (A))
- Export clearance and documentation
Buyer Responsibilities
- Import clearance and documentation
- Pay import duties and taxes
- Take delivery at agreed point
- Unload goods (unless EXW/FCA at seller's premises)
Important Notes:
DAP - Delivered at Place
Seller delivers goods to named place, ready for unloading
Seller Responsibilities
- Packaging and marking goods
- Contract and pay for carriage
- Export clearance and documentation
Buyer Responsibilities
- Obtain insurance (if desired)
- Import clearance and documentation
- Pay import duties and taxes
- Take delivery at agreed point
- Unload goods (unless EXW/FCA at seller's premises)
Important Notes:
DPU - Delivered at Place Unloaded
Seller delivers and unloads goods at named place
Seller Responsibilities
- Packaging and marking goods
- Contract and pay for carriage
- Export clearance and documentation
- Unload goods at destination
Buyer Responsibilities
- Obtain insurance (if desired)
- Import clearance and documentation
- Pay import duties and taxes
- Take delivery at agreed point
Important Notes:
- Only Incoterm that requires seller to unload goods at destination
DDP - Delivered Duty Paid
Seller bears all costs and risks including import duties
Seller Responsibilities
- Packaging and marking goods
- Contract and pay for carriage
- Export clearance and documentation
- Import clearance and duties
Buyer Responsibilities
- Obtain insurance (if desired)
- Import clearance and documentation
- Take delivery at agreed point
- Unload goods (unless EXW/FCA at seller's premises)
Important Notes:
FAS - Free Alongside Ship
Seller places goods alongside vessel at port
Seller Responsibilities
- Packaging and marking goods
- Export clearance and documentation
Buyer Responsibilities
- Contract and pay for carriage
- Obtain insurance (if desired)
- Import clearance and documentation
- Pay import duties and taxes
- Take delivery at agreed point
- Unload goods (unless EXW/FCA at seller's premises)
Important Notes:
- Only suitable for sea or inland waterway transport
FOB - Free on Board
Seller places goods on board the vessel
Seller Responsibilities
- Packaging and marking goods
- Export clearance and documentation
Buyer Responsibilities
- Contract and pay for carriage
- Obtain insurance (if desired)
- Import clearance and documentation
- Pay import duties and taxes
- Take delivery at agreed point
- Unload goods (unless EXW/FCA at seller's premises)
Important Notes:
- Only suitable for sea or inland waterway transport
CFR - Cost and Freight
Seller pays costs and freight to named port
Seller Responsibilities
- Packaging and marking goods
- Contract and pay for carriage
- Export clearance and documentation
Buyer Responsibilities
- Obtain insurance (if desired)
- Import clearance and documentation
- Pay import duties and taxes
- Take delivery at agreed point
- Unload goods (unless EXW/FCA at seller's premises)
Important Notes:
- Only suitable for sea or inland waterway transport
CIF - Cost, Insurance & Freight
Like CFR but seller must also insure goods
Seller Responsibilities
- Packaging and marking goods
- Contract and pay for carriage
- Obtain insurance (SELLER CLAUSES. (C))
- Export clearance and documentation
Buyer Responsibilities
- Import clearance and documentation
- Pay import duties and taxes
- Take delivery at agreed point
- Unload goods (unless EXW/FCA at seller's premises)
Important Notes:
- Only suitable for sea or inland waterway transport
Conclusion
The use of Incoterms in international trade is both widespread and essential for defining the responsibilities of sellers and buyers. However, disputes often arise due to misunderstandings or improper use of these terms. To avoid such conflicts, it is crucial for the contracting parties to ensure that the chosen Incoterm aligns with their expectations and logistical needs.
Before choosing an Incoterm, consider:
- Mode of Transport: Sea, air, road, rail, or multimodal?
- Risk Allocation: When should risk transfer occur?
- Cost Control: Which costs should each party bear?
- Customs Expertise: Who can better handle export/import formalities?
- Insurance Needs: Is insurance required and who should arrange it?
Best Practices:
- Always specify "Incoterms® 2020" in contracts
- Clearly define the named place/port
- Ensure both parties understand their obligations
- Consider getting legal advice for complex transactions
- Review insurance coverage requirements