Incoterms are to define the responsibilities of buyers and sellers for the delivery of goods under sales contracts. It is the authoritative rules to determine the costs and risks allocated to the parties. They are used regularly incorporated into the contracts for the sales of goods worldwide and it has become part of the language by all major trading nations.
The Origin of Incoterms
The first version of Incoterms rule was created in 1936 where they were officially designed as Incoterms. Since then, it has been evolved into a codified worldwide contractual standard. They are updated periodically in events in international trade occur and requires. These international trade terms are decided by 13 International Chamber of Commerce (ICC) commissions made up of experts from the private sector across the world.
The latest update was effective on January 1, 2020 and consists of 11 Incoterms. With each different Incoterms identify the responsibilities of the seller and the buyer in the transaction at different points in the shipping journey to ensure the Incoterms works better for certain modes of transportation.
Ex Works (EXW)
It is seller obligations by having the goods available to pick up at the premised or named place by the buyer. The buyer to bear all risk and cost starting from picking up the products at seller’s location. Seller does not have the obligation to load or clear the goods for export.However, the seller may have the responsibility for export compliance and requirement as buyer’s forwarder or designated party will need the information to declare goods for export.
Free Carrier (FCA)
The sellers can either deliver the goods to the buyer or the seller premises loaded on the vehicle or at a named place. The seller will be handling the goods over with the risked transferring to the buyer when delivery has been made. For this term, the seller must carry out export formalities and the buyer will carry out the import formalities.
Free Alongside Ship (FAS)
This term is rarely used but still, it is appropriate in shipments of heavy machinery which is brought to the wharf or barged up to them alongside the vessel. It can be loaded onboard by the buyer or its vessel’s equipment. For the seller will be the one who carries out export formalities and the buyer will carry out the import formalities. A buyer is the one who contracts the carriage therefore the shipper on the bill of lading should be the buyer. A copy of the billing of lading will likely be needed by the seller as evidence of export for their VAT / GST purposes.
Free on Board (FOB)
The seller and buyer must carry out all their export and import formalities. The buyer contracts for carriage, on the bill of lading, should be the buyer, not the seller. The seller will require at least have some form of evidence of export such as a copy of the bill of lading for their VAT/GST purposes. Often when there is a letter of credit involved the seller that is shown on the bill of lading as the shipper, in these case the seller would be wise to remind themselves of the additional liabilities they might be taking on under the terms and conditions of the bill of lading.
Cost & Freight (CFR)
One of the most used terms. The sellers will contract the carriage and place the goods on board the vessel. And from that points, the risk of loss or damage of the goods will transfer to the buyer. Onboard is no longer just placing the goods on the ship rail. It will be a matter for the contract based on the nature of the goods. The seller to carry out all export formalities and the buyer will carry out the import formalities.
Cost, Insurance & Freight (CIF)
CIF rule is identical to CFR. However, the risk is transfer is upon the seller upon loading the goods on board. Therefore, for CIF the seller is obliged to take out a minimum level of insurance cover for the buyer’s risk.The difference between CIF and CFR is that the risk of loss or damage at delivery becomes the buyers. The seller must provide the buyer with the insurance policy evidencing the seller as the party being insured and provide documents to allow the buyer to claim if it is required.
Carriage Paid To (CPT)
This rule requires the seller to deliver the goods to its carrier but does not indicate whether it will be loaded onto the collecting vehicle at seller’s premises or delivered to another premised but not unloaded from seller’s vehicle. The seller will carry out export formalities and the buyer will carry out the import formalities. For the contract for carriage are responsible by the seller’s therefore, the cost will be built into the selling price. The risk will be transfer to the buyer immediately when delivery has been made.
Carriage Insurance Paid To (CIP)
For seller will be responsible for the delivery of goods to the destination agreed in the buyer’s country and to bear for the cost of this carriage. However, for the seller risk will ends once the goods are placed on the ship, at the origin-destination. In this term, the seller requires to take a maximum insurance cover for the buyer’s risk. The buyer can by additional insurance during carriage of the goods, but the risk will be passed when the goods are received by the first carrier.
Delivered at Place (DAP)
This term can be used in any form of transport. The seller delivers the goods ate a named destination by the buyer but unloading of the goods will be by the buyer. The seller will carry out the export formalities and the buyer will carry out the import formalities. The seller will contract for the carriage and risk will be transferred upon delivery at buyers named place.
Delivery at Place Unload (DPU)
Previously named Delivered at Terminal (DAT) and it has been renamed to current terms because the buyer and/or seller may want to delivery of goods somewhere other than a terminal. This is often used for the consolidated container with multiple consignees. And this is the only terms that task the seller with unloading the goods. The seller can break down the shipment to make the goods available and if items require additional or special handling, the seller will be responsible for. The seller must make sure to engaged someone at destination to handle the goods to unload them.
Delivered Duty Paid (DDP)
DDP functions are like DAP expect that for DDP puts the maximum risk and responsibility on the seller. The seller will require to take the responsibility for clearing the goods for export bearing all risks and costs associated with delivering the goods, unloading goods at the terminal or place of destination, clear the goods for import clearance and payment and bring the goods to the destination. And the risk will transfer to the buyer at the destination.
Incoterms are the selling terms that both buyer and sellers agreed upon. It states clearly which tasks, costs and risks are related to the buyer and the seller. Incoterms are rules related to the International Commercial Law, published by the International Chamber of Commerce (ICC). It is accepted by governments and legal authorities around the world. The new Incoterms 2020 take effect from 1st of January 2020. Parties involved in the trade must understand the change and know how to apply to the global supply chain.
Ben Thompson (2020). “Incoterms® 2020 Explained – The Complete Guide” Retrieved from https://incodocs.com/blog/incoterms-2020-explained-the-complete-guide/, accessed on 16/09/2020.
Bob Ronai (2020). “Incoterms® Rules 2020 (International Commerce Terms)” Retrieved from https://www.tradefinanceglobal.com/freight-forwarding/incoterms/, accessed on 16/09/2020.
David Noah. (2020). “An Introduction to Incoterms”. Retrieved from https://www.shippingsolutions.com/blog/beginners-introduction-to-incoterms, accessed on 16/09/2020.
Sivalingam Munisamy. DLSM (2018). “The Eight P’s for Effective Delivery of an Integrated Logistics Operations”. Retrieved from SIPMM: https://sipmm.edu.sg/8-p-effective-delivery-integrated-logistics-operations, accessed 18/09/2020. Stelle Tan Chee Koon, DLSM. (2020).
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