Publish Time: 2024-12-27 Origin: Site
In international freight, many standardized rules exist worldwide. The most common are the trade terms.
International Commercial Terms or Incoterms are key to every shipment. Incoterms are standard contracts. They define the duties of shipping goods. They define the responsibilities and costs for the buyer and seller. This affects your costs and requires you to pay attention to which part you must take over.
What are Incoterms?
Freight incoterms (International Commercial Terms) serve as the standard terms within sales contracts for both importing and exporting activities. Their main function is to clarify the responsibility and liability regarding goods throughout the shipping process.
Put simply, they clearly indicate at which point the responsibility for the goods shifts from the supplier to the buyer. Moreover, they determine who will cover which costs associated with the goods as well as their transportation.
How Incoterms affect freight costs. For example, with EXW (Ex Works), you pay to deliver the goods from the supplier's site to the port.
Meaning: The goods are made available by the seller at their own premises. The buyer takes over from there.
Responsibilities:
Seller: Just have the goods ready at their place. Minimal obligation after that.
Buyer: Bears all costs and risks from the seller's premises, including transportation, insurance, and customs clearance.
FCA – Free Carrier
Meaning: The seller hands over the goods to the carrier or a person the buyer nominates at a specified place.
Responsibilities:
Seller: Delivers the goods to the carrier and clears for export. Risk passes to the buyer then.
Buyer: Takes on all costs and risks from when the goods are with the carrier, like transportation and import clearance.
CPT – Carriage Paid To
Meaning: The seller pays for the carriage of the goods to a named destination.
Responsibilities:
Seller: Arranges and pays for transport to the destination and clears for export.
Buyer: Responsible for risks after the goods are with the carrier and import clearance.
CIP – Carriage and Insurance Paid To
Meaning: The seller pays for carriage and insurance to a named destination.
Responsibilities:
Seller: Arranges transport, insurance, and clears for export.
Buyer: Takes on risks after goods are with the carrier and import clearance.
DAP – Delivered at Place
Meaning: The seller delivers the goods ready for unloading at a named destination.
Responsibilities:
Seller: Transports the goods to the destination and bears risks until unloading. Clears for export.
Buyer: Unloads the goods and does import clearance.
DPU – Delivered at Place Unloaded
Meaning: The seller delivers the goods unloaded at a named destination.
Responsibilities:
Seller: Transports and unloads the goods, bears risks until unloaded. Clears for export.
Buyer: Does import clearance.
DDP – Delivered Duty Paid
Meaning: The seller is responsible for delivering the goods to the destination in the buyer's country with all duties paid.
Responsibilities:
Seller: Does everything - transport, pay duties, insurance, export and import clearance
Buyer: Just takes possession of the goods.
FAS – Free Alongside Ship
Meaning: The seller places the goods alongside the ship at the port of shipment.
Responsibilities:
Seller: Delivers goods alongside the ship and clears for export. Risk passes to buyer then.
Buyer: Loads the goods onto the ship, pays for transportation and insurance, and does import clearance.
FOB – Free on Board
Meaning: The seller loads the goods on board the ship at the port of shipment.
Responsibilities:
Seller: Loads the goods on board, clears for export. Risk passes to buyer after loading.
Buyer: Pays for transportation from the port of shipment, insurance, and import clearance.
CIF – Cost, Insurance and Freight
Meaning: The seller pays for the cost of goods, insurance, and freight to the destination port.
Responsibilities:
Seller: Pays for goods, insurance, and freight. Clears for export. Risk passes to buyer after goods cross the ship's rail at the port of shipment.
Buyer: Unloads the goods, pays for inland transport and import clearance.
CFR – Cost and Freight
Meaning: The seller pays for the cost of goods and freight to the destination port.
Responsibilities:
Seller: Pays for goods and freight, loads the goods, clears for export. Risk passes to buyer after goods cross the ship's rail at the port of shipment.
Buyer: Arranges and pays for insurance, unloads the goods, pays for inland transport and import clearance.
Actually not, some international trade terms may be limited to certain modes of transport
1.For all modes of transport:
FCA, CPT, CIP, DAP, DPU, DDP.
2.Mainly for sea and inland waterway transport:
FAS, FOB, CIF, CFR.
3.Incoterms for Air Freight:
FCA,CPT,CIP,DAP,DPU,DDP
4.EXW:
Can work with any mode as the buyer arranges transport after takinggoods from seller's place.
| Incoterms | Seller's Trans. Task | Buyer's Trans. Task | Seller's Main Responsibilities | Buyer's Main Responsibilities |
| EXW | None | Arrange from seller's place | Make goods available | All costs & risks after pickup |
| FCA | To carrier/nominated person | After handover | Deliver to carrier, export clear | Costs & risks after handover, import clear |
| CPT | To named dest. | At dest. | Pay for carriage, export clear | Risk after carrier, import clear |
| CIP | To named dest. (with insurance) | At dest. | Pay for carriage & insurance, export clear | Risk after carrier, import clear |
| DAP | To named dest. | After arrival | Deliver ready for unloading, export clear | Unload, import clear |
| DPU | To named dest. & unload | After unloading | Transport & unload, export clear | Import clear |
| DDP | To buyer's dest. (all duties paid) | None | Full delivery with duties paid | Take possession |
| FAS | To ship's side at port | After alongside ship | Goods alongside ship, export clear | Load ship, transport, import clear |
| FOB | Load on ship at port | After on board | Load on ship, export clear | Transport from port, import clear |
| CIF | To dest. port (with insurance) | At dest. port | Pay for goods, freight & insurance, export clear | Unload, inland trans., import clear |
| CFR | To dest. port | At dest. port | Pay for goods & freight, export clear | Insurance, unload, inland trans., import clear |
The differences between Incoterms 2020 and 2010 are as follows:
1. Term Changes:
In 2010, someone introduced the term "DAT" (Delivered at Terminal). By 2020, it was replaced with "DPU" (Delivered at Place Unloaded). DPU has a broader scope than terminals. It offers more flexibility in specifying the delivery place for all transport modes.
2. Insurance Requirements:
For CIF, insurance needs stayed consistent. But for CIP, 2020 brought changes.Sellers must now insure goods for at least 110% of their value. This rule is tougher than the 2010 requirement.
3.Clear Responsibilities:
The 2020 Incoterms clarify the transfer of risks and responsibilities. The FCA term now better explains getting a shipped-on-board bill of lading. This reduces potential disputes.
4. Transportation and Delivery:
The 2020 Incoterms offer clearer guidance on transportation. They update the rules for DAP (Delivered at Place) and others. This update meets modern trade needs.It ensures a smoother transfer of goods and duties.
The 2020 Incoterms differ from the 2010 version. They aim to clarify and improve international trade terms. It helps businesses understand their obligations and risks in transporting goods.
Importers and exporters should consider which incoterms is best for them before the contract of sale is negotiated. This can prevent surprise costs and unnecessary complications.
Choosing an incoterm means getting on the same page as your supplier – it aligns everyone on shipping procedures when multiple parties and stakeholders are involved. These globally accepted terms ensure the timely payment of goods, services, and duties, while protecting suppliers, carriers, and buyers.
CIF is common for sea and inland shipments. The seller pays for the goods, freight, and insurance. The risk shifts when the goods leave the ship at the port. This option can help buyers who want a better service from the seller. It simplifies the process by having the seller handle the major parts of the shipment up to a point. Buyers must unload the goods at the destination port. They are also responsible for any inland transport costs and import customs clearance.
DAP is suitable for all modes of transport. The seller must deliver the goods, ready to unload, to the specified location. This includes covering transportation costs.The buyer must unload them. It balances the parties' responsibilities. It suits buyers who want control over the final delivery. But, they still rely on the seller for transport to that point.
CPT applies to all shipping methods. The seller pays for transport to the destination. However, the risk of loss shifts to the buyer once the seller hands over the goods to the first carrier. This incoterm allows the buyer to arrange and pay for insurance if desired. It is often favored by those who want a say in the coverage. They can handle the customs clearance and any further transport.
In South America, the reliability of transportation infrastructure can vary. In some countries, it may be better to choose an incoterm that puts more responsibility on the seller. The buyer may struggle with delays or disruptions during transit.
When to Stand Your Ground on Incoterm Selection
Shipping Incoterms clarify the costs and duties of buyers and sellers in transporting goods. They are very useful for this. However, there are several important aspects that they don't cover:
Product Quality and Specifications
Incoterms focus on the transfer of goods and associated transportation costs and risks. They don't cover the actual quality, traits, or compliance of goods with agreed specifications. If a buyer receives goods that fail to meet contract standards, Incoterms don't apply. This includes issues like incorrect dimensions, poor materials, or non-functional products. The contract of sale needs to have separate clauses regarding product quality, inspection rights, and remedies for non - compliance.
Intellectual Property Rights
Incoterms outline when ownership of goods changes hands. They do not address intellectual property rights. Additionally, Incoterms exclude disputes over patents, trademarks, or copyrights. They also do not assign blame for IP violations during or after shipping.
Force Majeure and Unforeseen Circumstances
Incoterms define transport risks and duties. They exclude natural disasters, wars, and strikes. In such cases, international law applies. However, Incoterms don't cover delays, damages, or cancellations from unforeseen events. So, adding force majeure clauses in contracts is wise for protection.
Financing and Payment Terms
Incoterms don't address payment methods, timing, or security. Buyers and sellers must agree on these, including options like letters of credit, cash upfront, or open accounts. For example, Incoterms don't dictate payment timing. Payment could be required before shipment, after inspection, or through a financial instrument.
Packaging Requirements Beyond Transportation Safety
Incoterms mainly deal with packaging. It must be safe for transporting the goods. They do not cover other aspects of packaging. These include marketing requirements, special branding, or specific materials needed for non-transit reasons. For example, if a buyer wants a specific retail package, Incoterms do not address this.