Freight incoterms : International Commercial Terms Explained

What do incoterms mean?

Incoterms are rules – set by the International Chamber of Commerce – that define the terms of trade for the sale of goods all around the world. You can think of them as the common language of trade – and by understanding them better, you will be better equipped in importing and exporting goods with parties around the world.

Whether you are handling a bill of lading, creating a packing list for a shipment, a customs invoice or commercial invoice; or preparing a certificate of origin at a port – Incoterms provide guidance along the way.

What Incoterms do cover

They do define the obligations and costs between a buyer and seller

They do define the point at which the risk for cargo passes between buyer and seller

They provide understanding for carriers, freight forwarders, customs brokers and others involved in shipping your goods.

What Incoterms don’t cover

They don’t cover the passage of title or ownership

They don’t cover payment – this is negotiated separately.

They don’t cover insurance – only two Incoterms®, CIF (Cost, Insurance and Freight) and CIP (Carriage and Insurance Paid), outline insurance as the seller’s responsibility.

What are the most common incoterms?

 

FOB (Free on Board)

FOB shipping means that the seller delivers the goods on board the vessel nominated by the buyer at the named port of shipment. They are responsible for all costs up until that point. Once the shipment is boarded, the buyer assumes risks and costs.

EXW (Ex Works)

Ex Works means that the seller delivers when it places the goods at the disposal of the buyer at the seller’s premises or at another named place (i.e., works, factory, warehouse, etc.).

DDP (Delivered Duty Paid)

The DDP Incoterm – “Delivered Duty Paid” – means that seller bears all the costs and risks involved in bringing the goods to the place of destination and has an obligation to clear the goods not only for export but also for import, to pay any duty for both export and import and to carry out all customs formalities.

FCA (Free Carrier)

Free Carrier means that the seller delivers the goods to a carrier or another person nominated by the buyer, at the seller’s premises or another named place. With FCA shipping terms, the parties are well-advised to specify, as clearly as possible, the point within the named place of delivery, as the risk passes to the buyer at that point.

CIF (Cost, Insurance and Freight)

The seller delivers the goods, cleared for export, onboard the vessel at the pot of the shipment. He also pays for the transport of the goods to the port of destination. Additionally, the seller contracts for insurance cover against the buyer’s risk of loss or damage to the goods during the carriage.

DAP (Delivered at Place)

The DAP term in shipping means that the seller delivers when the goods are placed at the disposal of the buyer on the arriving means of transport ready for unloading at the named place of destination. The seller bears all risks involved in bringing the goods to the named place.

▪️FAS (Free Alongside Ship): 

The seller delivers the goods alongside the ship (on a barge or quay, for example). The buyer must load the goods on the ship. This rule applies only to sea transport.

▪️CFR (Cost and Freight): 

The seller delivers the goods on a ship at the designated port and pays for cost and freight to bring the goods to the port.

▪️CPT (Carriage Paid To): 

The seller delivers the goods to a named place and pays for carriage to that place.

▪️CIP (Carriage and Insurance Paid To): The seller delivers the goods to a named place, pays for both carriage and insurance of the goods to that place.

▪️DPU (Delivered At Place Unloaded): The seller delivers the goods at a designated place and unloads them, bearing the risks and costs of both. This is the only rule that requires the seller to unload the goods to complete delivery. The buyer takes care of any import clearance charges, taxes and duties.

▪️DDP (Delivered Duty Paid): The seller bears the maximum responsibility here as he arranges for carriage and delivery of goods at a named place, and pays for import clearance as well as any duties and taxes that might apply