When negotiating an international sales contract the Terms of Sale can be just as important as the sale price. Language barriers could complicate this point. Since 1936 the Incoterms created by the International Chamber of Commerce (ICC) has been used to breakdown these barriers.
INternational COmmerce Terminology (Incoterms) defines exactly the shipping responsibilities of both the buyer and the seller. This table illustrates the cost responsibilities for each party –
What does this all mean?
Here is a simple explanation of the most commonly used terms:
EXW - ExWorks (2010 and 2020)
This term represents the seller's minimum obligation, since he only has to place the goods at the disposal of the buyer. The buyer must carry out all tasks of export & import clearance. Carriage & insurance is to be arranged by the buyer.
FCA - Free Carrier (2010 and 2020)
This term means that the seller delivers the goods, cleared for export, to the carrier nominated by the buyer at the named place. Seller pays for carriage to the named place.
CPT - Carriage Paid To (2010 and 2020)
This term means that the seller delivers the goods to the carrier nominated by him but the seller must in addition pay the cost of carriage necessary to bring the goods to the named destination. The buyer bears all costs occurring after the goods have been so delivered. The seller must clear the goods for export. This term may be used irrespective of the mode of transport (including multimodal).
CIP - Carriage and Insurance Paid (2010 and 2020)
This term is the same as CPT with the exception that the seller also has to procure insurance against the buyer’s risk of loss or damage to the goods during the carriage, which is at least equivalent to the conditions of ICC A. This term may be used for any mode of transportation.
DPU - Delivered at Place Unloaded (2020)
Seller delivers until unloading of arriving means of transport, bears the risk until agreed place of destination and exports. This term may be used for any mode of transportation.
DAP - Delivered At Place (named place of destination) (2010 and 2020)
Seller pays for carriage to the named place, except for costs related to import clearance, and assumes all risks prior to the point that the goods are ready for unloading by the buyer.
DDP - Delivered Duty Paid (2010 and 2020)
This term represents maximum obligation to the seller. This term should not be used if the seller is unable to directly or indirectly to obtain the import license. The terms means the same as the DDU term with the exception that the seller also will bear all costs & risks of carrying out customs formalities including the payment of duties, taxes & customs fees.
FAS - Free Alongside Ship (2010 and 2020)
This term means that the seller delivers when the goods are placed alongside the vessel at the named port of shipment. The seller is required to clear the goods for export. The buyer has to bear all costs & risks of loss or damage to the goods from that moment. This term can be used for ocean transport only.
FOB - Free On Board (2010 and 2020)
This term means that the seller delivers when the goods pass the ship's rail at the named port of shipment. This means the buyer has to bear all costs & risks to the goods from that point. The seller must clear the goods for export. This term can only be used for ocean transport. If the parties do not intend to deliver the goods across the ship's rail, the FCA term should be used.
CFR - Cost and Freight (2010 and 2020)
This term means the seller delivers when the goods pass the ship's rail in the port of shipment. Seller must pay the costs & freight necessary to bring the goods to the named port of destination, BUT the risk of loss or damage, as well as any additional costs due to events occurring after the time of delivery are transferred from seller to buyer. Seller must clear goods for export. This term can only be used for ocean transport.
CIF - Cost, Insurance, Freight (2010 and 2020)
The seller delivers when the goods pass the ship’s rail in the port of shipment. Seller must pay the cost & freight necessary to bring goods to named port of destination. Risk of loss & damage same as CFR. Seller also has to procure marine insurance against buyer’s risk of loss/damage during the carriage, which is at least equivalent to the conditions of ICC C. Seller must clear the goods for export. This term can only be used for sea transport.
Incoterms (international delivery terms), what’s in it?
The incoterms define the role between seller and buyer at an international transaction. Who has to do what en at what time? In the contract between the seller and the buyer, the following is determined:
The duties of the buyer and the seller
Who takes care of the insurances, licences, permissions and all other formalities
Who arranges the transport untill which point and who is responsible for this
The point where the costs and risks pass on from the seller to the buyer.
There are eleven different incoterms in Incoterms 2020. These incoterms take care of the international rights and duties from the buyer and the seller. Four of of the eleven incoterms are about ocean freight. The remaining seven incoterms are regarding all transport modalities. The Incoterms are being prepared and published by the International Chamber of Commerce (ICC).
Choosing the right terms
Each option has its own benefits and risks for both the buyer and the seller.
- Freight Control – Working on tight time frames or stock control it is essential to know where your freight is the majority time
- Buyer – EXW, FOB, CFR/CIF Seller – DAT, DAP, DDP
- Cost Control – Knowing the cost of the freight will help you work out the true cost of your products
- Buyer – EXW, FOB, CFR/CIF Seller – DAT, DAP, DDP
- Lack of visibility – Stock control
- Buyer – DAT, DAP, DDP Seller –EXW, FOB, CFR/CIF
- Unexpected costs – Not having the ability you nominate your forwarder can incur additional costs that you haven’t taken into account, resulting in loss of profit
- Buyer – CFR/CIF, DAT Seller – FOB
Incoterms get updated periodically. The full current list of Incoterms (2010) is available for purchase on the ICC website.
For further information on Incoterms contact your local Air & Ocean Team.