Incoterms® play such a vital part in global trade. But buyers and sellers must clearly understand how they work and their obligations along the supply chain. Incoterms® are the selling terms that the buyer and seller of goods both agree to during international transactions. These rules are accepted by governments and legal authorities (International Chamber of Commerce) around the world. Understanding Incoterms® is a vital part of International Trade because they clearly state which tasks, costs and risks are associated with the buyer and the seller. The Incoterm® states when the seller’s costs and risks are transferred onto the buyer. It is also important to understand that not all rules apply in all cases.
The Incoterms® rules feature a series of three-letter trade terms which all have very precise meanings for the sale of goods around the world. Some encompass any mode and modes of transport (this category includes EXW, FCA (a), FCA (b), CPT, CIP, DPU, DAP and DDP). Whereas others only apply for sea and inland waterway transport (FAS, FOB, CFR and CIF), which we explain below.
Often used when making an initial quotation for the sale of goods without any costs included, EXW means that the seller makes the goods available at their premises or at another named place (works, factory, warehouse etc).
The seller does not need to load the goods on any collecting vehicle, nor does it need to clear the goods for export.FCA – Free Carrier
FCA can have two different meanings, each with varying levels of risk and cost for the buyer and seller.
FCA (a) is used when the seller delivers the goods, cleared for export, at a named place which is their own premises.
FCA (b) is used when the seller delivers the goods, cleared for export, at a named place which is not their premises.
In both instances, the goods can be delivered to a carrier nominated by the buyer, or to another party nominated by the buyer.
Under CPT the seller pays for the carriage of goods up to the named place of destination.
The seller must contract for and pay the costs of carriage necessary to bring the goods to the named place of destination.CIP – Carriage and Insurance Paid
Similar to CPT with the exception that the seller is required to obtain minimum insurance for the goods while in transit.
The buyer should note that under CIP the seller is required to obtain insurance only on minimum cover. Should the buyer wish to have more insurance protection, it will need either to agree as much expressly with the seller or to make its own extra insurance arrangements.DAP – Delivered at Place
The seller is deemed to have delivered when the goods are placed at the disposal of the buyer on the arriving means of transport and ready for unloading at the named place of destination.
Under DAP terms, the seller needs to manage all risks involved in bringing the goods in.
This Incoterm requires that the seller delivers the goods, unloaded, at the named place.
The seller covers all the costs of transport (export fees, carriage, unloading from main carrier at destination port and destination port charges) and assumes all risk until arrival at the destination place.DDP – Delivered Duty Paid
The seller is responsible for delivering the goods to the named place in the country of the buyer and pays all costs in bringing the goods to the destination including import duties and taxes.
The seller is not responsible for unloading.
The seller delivers when the goods are placed alongside the vessel (e.g., on a quay or a barge) nominated by the buyer at the named port of shipment.
The risk of loss of or damage to the goods passes when the goods are alongside the ship, and the buyer takes on responsibility for all costs from that moment onwards.FOB – Free on Board
The seller delivers the goods on board the vessel nominated by the buyer at the named port of shipment or procures the goods already so delivered.
The risk of loss of or damage to the goods passes when the goods are on board the vessel, and the buyer takes on responsibility for all costs from that moment onwards.
The seller delivers the goods on board the vessel.
The risk of loss of or damage to the goods passes when the goods are on board the vessel.
The seller must contract for and pay the costs and freight necessary to bring the goods to the named port of destination.CIF – Cost, Insurance and Freight
The same as CFR with the addition that the seller must also obtain minimum insurance cover against the buyer’s risk of loss of or damage to the goods during the carriage.
The most obvious change is renaming the term Delivered at Terminal (DAT) to Delivered at Place Unloaded (DPU).
The most significant change relates to the term Free Carrier (FCA). Under this term, the buyer can now instruct its carrier to issue a bill of lading with an on-board notation to the seller so that they may satisfy the terms of a letter of credit.
Under the revised term CIP, the seller is now responsible for purchasing a higher level of insurance coverage—at least 110% of the value of the goods as detailed in Clause A of the Institute Cargo Clauses. The insurance requirement hasn’t changed for CIF.
Incoterms 2020 rules recognizes sellers who may use their own transport to deliver the goods. The terms now expressly state that sellers can make a contract for carriage or simply arrange for the necessary transportation.
Incoterms 2020 rules now specifically call out the import and export security requirements and identify whether the buyer or seller is responsible for meeting those requirements.