International Commercial Terms, known as “Incoterms”, are a series of pre-defined commercial terms published by the International Chamber of Commerce (ICC) widely used in international commercial transactions. The Incoterms define the responsibilities of exporters and importers in the arrangement of shipments and the transfer of liability involved at various stages of the transaction. It is crucial to agree on an Incoterm at the start of a negotiation/quotation of a sale, as it will affect the costs and responsibilities involved in shipping, insurance and tariffs.
The International Chamber of Commerce updates the Incoterms rules every 10 years to adapt them to contemporary commercial practice, so the new Incoterms 2010 rules were revised and became effective on January 1, 2011. The new Incoterms 2010 rules explain standard terms that are used in contracts for the sale of goods. These are essential International Chamber of Commerce tools that help traders avoid misunderstandings by clarifying the costs, risks and responsabilities of both buyers and sellers resulting in better clarification and application of the eleven (11) Incoterms, and consistent with the way global trade is actually conducted since the last update in 2000.
The main difference between the 2000 version and the new 2010 version are that there are 11 rules instead of 13. The 2000 version also grouped Incoterms rules into 4 term categories. The new 2010 version is classified in 2 categories according to the mode of transport (maritime vs. any other mode[s]) that are listed below in order of increasing risk/liability to the exporter. The DAT (Delivered at Terminal) and DAP (Delivered at Place) Incoterms replace the former claused DEQ, DAF, DES and DDU.
Under the revised terms, buyers and sellers are being urged to contract precisely where delivery is made and what charges are covered. This should avoid double-billing of terminal handling charges at the port of discharge. References to “ship’s rail” were taken out to clarify that delivery means “on-board” the vessel. Insurance, electronic documentation, and supply chain security are addressed in more detail, and gender-neutral language is now used.
Rules for Any Mode or Modes of Transportation
|EXW||Ex Works||Seller delivers (without loading) the goods at disposal of buyer at seller’s premises. Long held as the most preferable term for those new-to-export because it represents the minimum liability to the seller. On these routed transactions, the buyer has limited obligation to provide export information to the seller.|
|FCA||Free Carrier||Seller delivers the goods to the carrier and may be responsible for clearing the goods for export (filing the EEI). More realistic than EXW because it includes loading at pick-up, which is commonly expected, and sellers are more concerned about export violations.|
|CPT||Carriage Paid To||Seller delivers goods to the carrier at an agreed place, shifting risk to the buyer, but seller must pay cost of carriage to the named place of destination.|
Carriage and Insurance Paid to
|Seller delivers goods to the carrier at an agreed place, shifting risk to the buyer, but seller pays carriage and insurance to the named place of destination.|
|DAT||Delivered At Terminal||Seller bears cost, risk and responsibility until goods are unloaded (delivered) at named quay, warehouse, yard, or terminal at destination. Demurrage or detention charges may apply to seller. Seller clears goods for export, not import. DAT replaces DEQ, DES.|
|DAP||Delivered At Place|| |
Seller bears cost, risk and responsibility for goods until made available to buyer at named place of destination. Seller clears goods for export, not import. DAP replaces DAF, DDU.
|DDP||Delivered Duty Paid||Seller bears cost, risk and responsibility for cleared goods at named place of destination at buyers disposal. Buyer is responsible for unloading. Seller is responsible for import clearance, duties and taxes so buyer is not “importer of record”.|
Rules for Sea and Inland Waterway Transport
|FAS||Free Alongside Ship||Risk passes to buyer, including payment of all transportation and insurance costs, once delivered alongside the ship (realistically at named port terminal) by the seller. The export clearance obligation rests with the seller.|
|FOB||Free On Board|| |
Risk passes to buyer, including payment of all transportation and insurance costs, once delivered on board the ship by the seller. A step further than FAS.
|CFR||Cost and Freight|
Seller delivers goods and risk passes to buyer when on board the vessel. Seller arranges and pays cost and freight to the named destination port. A step further than FOB.
|CIF||Cost, Insurance and Freight||Risk passes to buyer when delivered on board the ship. Seller arranges and pays cost, freight and insurance to destination port. Adds insurance costs to CFR.|
INCOTERMS DO NOT…
- Give a complete contract of sale.
- Determine the price to be paid or the method of payment.
- Deal with the transfer of ownership of the goods, or consequences of a breach of contract.
For more information on Incoterms 2010 click here.