The International Chamber of Commerce (ICC) first created the international commercial terms (Incoterms®) in 1936 to facilitate and promote international trade and commerce. Since then, the ICC has been updating these terms. Known in short as Incoterms®, these terms explain aspects and obligations of international commerce in simple, clear terms so that there is no miscommunication between sellers and buyers when they trade in goods on the international level.
The terms spell out who will pay the costs of freighting and insuring the goods, where and when the goods are to be delivered, what the payment is for the goods, and who assumes the risk of loss or damage of the goods once they have been delivered.
As mentioned, the purpose of the Incoterms® is to leave no room for trade misunderstandings, but the terms are not, in themselves, binding contracts. Sellers and buyers should have proper legal contracts in place for their transactions and they should make sure that they follow the governing laws of the countries in which or through which they are trading. The sellers and buyers can stipulate in their trade contracts any of the changes that they want to make to the Incoterms®.
Incoterms® 2010 defines 11 rules, down from the 13 rules defined by Incoterms® 2000. Four rules of the 2000 version [DAF (Delivered at Frontier, DES (Delivered Ex Ship), DEQ (Delivered Ex Quay), DDU (Delivered Duty Unpaid)] were removed, and are replaced by two new rules [ DAT (Delivered at Terminal), DAP (Delivered at Place)] in the 2010 rules.
Incoterms® 2010 also formally defined delivery. Before 2010, the term was defined informally, but it is now defined as the point in the transaction where "the risk of loss or damage [to the goods] passes from the seller to the buyer."
Here are some quick definitions of the important terms used in Incoterms® 2010:
Delivery: The point in the transaction where the risk of loss or damage to the goods is transferred from the seller to the buyer.
Arrival: The point named in the Incoterm to which carriage has been paid.
Free: Seller has an obligation to deliver the goods to a named place for transfer to a carrier.
Carrier: Any person who, in a contract of carriage, undertakes to perform or to procure the performance of transport by rail, road, air, sea, inland waterway or by a combination of such modes.
Freight Forwarder: A firm that makes or assists in the making of shipping arrangements.
Terminal: Any place, whether covered or not, such as a dock, warehouse, container yard or road, rail or air cargo terminal.
To Clear For Export: To file Shipper’s Export Declaration and get an export permit.
Buyer's ResponsibilitySeller's Responsibility
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|Expert Documentation/Duty Payment||B||S||S||S||S||S||S||S||S||S||S|
|Transport to Orogin Port||B||S||S||S||S||S||S||S||S||S||S|
|Unloading from Truck at Origin Port||B||B||S||S||S||S||S||S||S||S||S|
|Charges at Origin Port||B||B||B||S||S||S||S||S||S||S||S|
|Shipment to Destination Port||B||B||B||B||S||S||S||S||S||S||S|
|Charges at Destination Port||B||B||B||B||S||S||S||S||S||S||S|
|Loading to Truck at Destination Port||B||B||B||B||B||B||B||B||S||S||S|
|Transport to Buyer's Location||B||B||B||B||B||B||B||B||B||S||S|
|Customs Clearance, Duties, Taxes||B||B||B||B||B||B||B||B||B||B||S|
= Ex Works
= Free Alongside Ship
= Free Carrier
= Free On Board
= Cost and Freight
= Cost, Insurance, and Freight
= Carriage Paid To
= Carriage and Insurance Paid To
= Delivered at Terminal
= Delivered at Place
= Delivered Duty Paid
Let us look at some of the commonly used Incoterms® for the transportation of goods. We have categorized them based on the mode of transport.
1. FAS (Free Alongside Ship) (named port of shipment)
The international commerce term Free Alongside Ship (FAS) indicates that the seller must take on the responsibility of clearing goods for export at customs and delivering them to an agreed upon sea or inland port alongside the ship that the buyer has designated. The FAS contract mentions the type of transportation involved in the transaction, the delivery time, the delivery place, the payment amount, and the payment mode. The contract also mentions when the buyer assumes the risk of loss from the seller, and who will be paying the freight cost and the insurance cost.
It is the seller's responsibility to clear the goods with customs for export. The buyer assumes the cost of loading, sea transportation, and insurance. FAS facilitates the shipping of a variety of items that are not transported in containers; items that are transported in containers are generally delivered to a container yard or terminal, and the buyer must then collect them from there. On the other hand, goods that are not transported in containers can be delivered to any destination that the buyer wants.
2. FOB (Free On Board) (named port of shipment)
The Incoterm FOB (Free On Board) applies to goods transported by ships and boats through seas, rivers, and canals. The seller is responsible for transporting the goods to the departure port and pays for all associated costs and risks. The seller acquires the necessary export permits and other documentation. The seller’s responsibility ends after the goods have been loaded on to the vessel if the contract is Free on-board Shipping Point.
The buyer assumes ownership and all liabilities for the goods. The buyer pays the freight costs and the insurance costs. If the contract is Free On-Board Destination, then the seller is liable and responsible for the goods until the destination port is reached. The buyer takes delivery of the goods at the destination port, and all responsibilities associated with the goods are then transferred from the seller to the buyer.
3. CFR (Cost and Freight) (named port of destination)
The Incoterm CFR (Cost and Freight) is a sales contract wherein it is the seller’s sole responsibility to arrange for the transportation of the goods to pay for transporting the goods by waterways, either by sea, river, or canal, to a destination port specified by the buyer. This contract is suited for transporting goods in bulk which cannot be packed inside a container. In addition to paying for the transport of the goods, the seller has to pay for delivering the goods to the agreed upon departure port. The seller must also pay for acquiring export licenses and for loading the goods on to the transport vessel. The seller’s liabilities end here as the CFR contract does not require the seller to insure the goods for further transportation. The buyer will have to insure the goods if they think it necessary.
Once the goods are loaded on to the transport vessel, the buyer becomes responsible for any loss or damage to the goods. The seller must provide the buyer with all essential documents such as invoices, proof of delivery, and any other documents that the buyer will need to accept the delivery of the goods at the destination port. The buyer is responsible for acquiring any import licenses or other permits and paying for any customs duties and taxes levied by the destination country.
4. CIF (Cost, Insurance, and Freight) (named port of destination)
Cost, Insurance, and Freight is an Incoterm in which the seller is responsible for transporting the goods by sea or inland waterways to a destination port specified by the buyer. The seller pays all the transportation costs from the seller’s premises to the departure port and then from the departure port to the destination port. The seller is responsible for procuring export licenses and other documentation and loading the goods on to the transport vessel.
Although most of the seller’s liabilities end here, the seller still must cover the buyer’s risk against loss or damage to the goods during transit and pay for insuring the goods. The CIF contract applies only to goods that are not transported in containers.
Along with paying the contract sale price, the buyer must acquire import licenses and any official authorizations and complete all necessary customs formalities and payment for importing and transporting the goods through different countries, if necessary, on the way to the end destination. The buyer will bear the risk of loss or damage to the goods once the goods are on the ship and will receive the goods when they are delivered at the end destination. The buyer will pay for the unloading of the goods at the final destination.
1. EXW (Ex Works) (named place of delivery)
In the Ex Works contract, the buyer transports the goods from the seller’s premises to the buyer’s destination. The transport mode may be whatever is convenient for both parties, road, rail, air, sea, or waterways. The buyer is responsible for loading the goods for transportation, acquiring export and import licenses, getting security clearances, paying taxes and customs duties, unloading the goods at the destination, storing the goods at a warehouse at the destination, and all other costs and liabilities. The buyer is also responsible for insuring the goods while they are in transit. The only responsibility the seller has is to make sure that the goods are properly packaged and available for transport, and that all the documentation for customs and shipping are in correct order.
The buyer may request the seller to load the goods at the buyer’s risk. If the buyer does not have the capability to complete the necessary export procedures or if the country does not allow foreign entities to do so, the buyer may request the seller to assist in getting export licenses and other documentation at the buyer’s expense.
2. FCA (Free Carrier) (named place of delivery)
The Incoterm FCA is suitable for any transport mode, rail, sea, road, and air, and for more than one transport modes in scenarios where the seller arranges for packaging the goods and loading them onto the carrier to transport the goods from the seller's depot to the agreed upon place of delivery.
The seller must also assume the responsibility of getting the goods cleared for export through customs. Once customs have cleared the goods, they become the buyer's responsibility. The buyer must now undertake the shipment of the goods, must unload the goods at the port of the buyer's choice, and must transport the goods to the final destination.
3. CPT (Carriage Paid To) (named place of destination)
The Incoterm CPT is used for any transport mode such as air, rail, road, sea, and inland waterways, and also for a combination of these transport modes. In this type of sales contract, the seller assumes the responsibility for packaging the goods and arranging for their transport carrier to the agreed upon location and paying any required export fees and taxes to the country of origin.
The seller, however, does not undertake the responsibility for insuring the goods during transit. Once the goods have been delivered to the buyer's destination, the seller is no longer responsible for the goods, and the entire risk of loss or damage to the goods is now transferred over to the buyer.
This holds true the moment the buyer receives the first goods carrier. This means that even if there are other goods carriers that still have to arrive at the buyer's destination, the responsibility of the loss or damage of the goods now lies wholly with the buyer. So, if one of the still to arrive trucks gets into an accident en route and the goods are damaged, the buyer is the one that will have to bear the loss.
To avoid such a situation, the buyer may prefer to get insurance on the goods beforehand. In addition to insuring the goods, the buyer must also pay for their unloading at the destination and for transporting them from there to a warehouse or any other destination of the buyer's choice.
4. CIP (Carriage and Insurance Paid To) (named place of destination)
The CIP Incoterm is used for any rail, ship, air, inland waterway, and road transport mode and even for multiple forms of transportation. In the CIP sales contract, the seller assumes the responsibility for packaging the goods and for insuring them for around 110 percent of the contract’s value. If the buyer thinks it is necessary to have additional insurance coverage for the goods during transit, they must arrange for that at their own expense. In addition to packaging and insuring the goods, the seller is responsible for clearing the goods for export from the country of origin and for arranging for the transportation of the goods from the seller’s premise to the location previously agreed upon with the buyer.
Once the goods have been delivered to the delivery place, the seller is no longer responsible for them and the buyer assumes the risk of loss or damage to the goods. The buyer is also responsible for getting the export license and the import permit for exporting the goods. The term CIP is used to indicate the destination of the goods. So, for instance, if the contract says CIP San Francisco, the seller must pay for the freight and insurance of the goods all the way to San Francisco.
5. DAT (Delivered at Terminal) (named terminal at port or place of destination)
This Incoterm was specified in 2010. Places such as warehouses, container yards, transport hubs, and quays are called terminals. In the DAT contract, the seller is responsible for packaging and transporting the goods to a designated terminal by whatever transport mode is convenient. Neither the seller nor the buyer is obligated to insure the goods. The seller has to acquire export licenses. The seller provides invoices, proof of delivery, and other necessary documentation to the buyer. Once the seller has unloaded the goods at the terminal, the risk for the loss or damage of the goods transfers to the buyer. The buyer is responsible for acquiring import licenses and paying taxes and customs duties for importing the goods. If the goods have to be cleared through customs before they can be delivered, there may be demurrage disputes between the buyer and the seller's chartered transporter.
6. DAP (Delivered at Place) (named place of destination)
Three Incoterms Delivered At Frontier, Delivered Ex Ship and Delivered Duty Unpaid were replaced by one term Delivered at Place in 2010. This term specifies that the seller is responsible for packaging and transporting the goods to the agreed upon destination. The seller can use any mode of transport and bears all the associated risks including insuring the goods up to the delivery point. The seller is required to obtain export licenses and prepare documents such as invoice, proof of delivery and any other required documentation. When the goods reach the delivery place, the risks associated with the goods are transferred to the buyer. The buyer has the responsibility to unload the goods, obtain import licenses and pay for taxes and customs duties, and arrange for further transportation.
7. DDP (Delivered Duty Paid) (named place of destination)
According to the Incoterm Delivered Duty Paid or DDP, the responsibility for delivering the goods lies with the seller. Therefore, the seller must deliver the goods to the agreed upon destination at the agreed upon date and time and pay for all the costs associated with the delivery. The buyer should consider the fact that the price of the goods is determined by the charges incurred by the seller.
The seller may transport the goods by road, railway, airway, or waterway and is liable for any loss or damage to the goods. If applicable, the seller may get some benefits in case of unforeseen circumstances from Contracts for the International Sale of Goods and other provisions. The seller must get all necessary export and import clearances and pay any taxes and customs duties imposed on the goods. The seller must also arrange for the insurance for the goods in transit.
Two issues that the seller and buyer must consider are that in some countries only entities registered locally can pay taxes and in some countries, the laws may be so complex that the buyer is more likely to have expert knowledge of how to get import clearances and at lower costs too. If the buyer is paying the tax, then the contract is denoted as Delivered Duty Paid (tax unpaid), and in some cases, the buyer may be able to get tax benefits which can be passed on to the seller.
The seller must prepare all documentation such as sales contract, packaging and transport contracts, proof of delivery, and any other required documents. Once the goods are delivered to the destination, the buyer is responsible for unloading the goods and all other risks and responsibilities associated with the goods.
The following Incoterms® from the year 2000 were removed by the ICC when it published new Incoterms® in 2010:
1. DAF (Delivered At Frontier)
The shipping term Delivered At Frontier (DAF) was replaced by Delivered at Terminal and Delivered at Place in 2010. When this term was in use, its precise meaning differed in various countries, but the term usually referred to goods being transported by road or railway across international borders.
Under this contract, the seller is responsible for transporting the goods to an international border post. The seller pays for all the costs and risks associated with the delivery of the goods to the frontier of his country. The seller procures export licenses and pays customs duties and taxes. The seller must provide the buyer with all the necessary documentation.
The seller is under no obligation to insure the goods while they are in transit. However, if the buyer asks for assistance with getting insurance for the goods, the seller must assist the buyer with all the relevant information for this purpose.
The buyer takes delivery of the goods, and the costs and risks associated with the goods then become the buyer’s responsibility. The buyer transports the goods from the seller’s border post to his country’s border post and is responsible for acquiring import licenses and paying for import customs duties and taxes.
2. DES (Delivered Ex Ship)
The Incoterm Delivered Ex Ship was made obsolete in 2010 and now the terms Delivered at Terminal or Delivered at Place are used. In this contract, the seller is responsible for transporting the goods by sea or inland waterways to the specified destination port. The seller has to pay for transporting the goods to the departure port, loading the goods on to the vessel, procuring export licenses, and any other costs. The seller also bears the risk of loss or damage to the goods until the destination port is reached.
The seller is not obliged to provide insurance for the goods while they are in transit but is expected to give the buyer all the necessary information and assistance for getting insurance for the goods, if the buyer makes such a request.
At the destination port, once the goods are delivered, the responsibility for them transfers to the buyer. The buyer then becomes responsible for unloading the goods, acquiring import permits, and paying for customs duties and taxes.
3. DEQ (Delivered Ex Quay)
Delivered Ex Quay (DEQ) is a standard contract term defined by the International Chamber of Commerce. The term was made obsolete in 2011 and was replaced by Delivered At Terminal (DAT).
The DEQ contract is only used when goods are delivered by boats and ships to a quay located in a harbor or on the bank of a river or a canal. The seller is responsible for delivering the goods to the destination quay and paying for the packaging and transportation costs. The seller is liable for any loss or damage to the goods, and any other necessary costs. The seller is usually also responsible for paying any taxes and customs duty associated with the goods to be delivered and in this case, the contract is denoted as duty paid. The delivery may be denoted as duty unpaid if the buyer has agreed to pay the taxes and duties.
The seller is responsible for preparing all the documentation necessary to deliver the goods to the buyer. The documentation may be in electronic form. The seller must have an export license or legal permits as required by the country from which the goods are sourced, and the seller must also have an import license or have legal permits as required by the destination country’s laws.
The insurance for the goods in transit is not the seller’s responsibility. If the buyer wishes to take insurance, they must do so at their own expense. The seller is, however, expected to assist the buyer with all the information and documentation for procuring the insurance for the goods.
In this contract, the buyer has the obligation to provide any assistance the seller needs to acquire importation documents of the buyer’s country, at the seller’s risk and cost. The buyer must provide a proof of delivery document to the seller. After the buyer takes delivery of the goods, the buyer is responsible for all costs incurred thereafter.
4. DDU (Delivered Duty Unpaid)
The contract term Delivered Duty Unpaid was replaced by Delivery at Place (DAP) in 2011, but the term is still in common use in international trade. In this contract the seller is responsible for delivering goods to the specified destination, bearing all the risks and costs of transporting the goods. The seller is not obligated to insure the goods in transit but is held liable for loss, damage, or theft of the goods. The seller must obtain export licenses and any other permits and prepare documentation such as invoices.
The buyer is responsible for acquiring import licenses and paying taxes and customs duties to take delivery of the goods at the destination. Thereafter, all the risks and costs associated with the goods such as unloading and further transportation are the buyer’s responsibility. Both the seller and the buyer might prefer this contract as they don’t have to wade through export and import laws of each other’s countries, each is responsible in his own country.