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Freight Basics - Incoterms

Posted on 5 October 2013

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.

Incoterms 

INternational COmmerce Terminology (Incoterms) defines exactly the shipping responsibilities of both the buyer and the seller. 

What does this all mean? 

Here is a simple explanation of the most commonly used terms:

For all modes of Transport 

EXW – Ex Works (….named place of delivery)

The Seller’s only responsibility is to make the goods available at the Seller’s premises. The Buyer bears full costs and risks of loading and moving the goods from there to destination, including arranging for the export clearance. It is not recommended for international moves.

FCA – Free Carrier (…named place of delivery)

Delivery is made either when goods are (1) loaded on the means of transport provided by the buyer at the seller’s stated location; or (2) when placed at the disposal of the buyer’s carrier, cleared for export by the seller. From either point of delivery, the Buyer bears the costs and risks of moving the goods to destination. The named place/address is required when FCA is used.

CPT – Carriage Paid To (…named place of destination)

The Seller delivers and transfers risk of loss or damage by handing over goods to the carrier chosen by the seller, cleared for export, who pays for moving the goods to the named place of destination. From the time the goods are transfered to the first carrier, the Buyer bears the risks of loss or damage.

CIP – Carriage And Insurance Paid To (…named place of destination)

The Seller delivers and transfers risk of loss or damage by handing over goods to the carrier chosen by the seller, cleared for export, who pays for moving the goods to the named place of destination. From the time the goods are transferred to the first carrier, the Buyer bears the risks of loss or damage. The Seller, however, purchases cargo insurance thru to the named place of destination.

DPU – Delivered At Named Place, Unloaded (named address/place of destination)

The Seller delivers when the goods, once unloaded from the arriving means of transport, are placed at the Buyer’s disposal at a place of destination. The Seller bears all risks involved in bringing the goods to and unloading them at the terminal at the named port or place of destination. DPU is the only Incoterms where the Seller must pay for unloading at destination. As seller is responsible for unloading the goods at destination it is highly recommended to be as specific as possible as to the named address/place of destination as all costs thru to unloading are for the selller’s account.

DAP – Delivered At Place (…named address/place of destination)

The Seller delivers when the goods are placed at the Buyer’s disposal on the arriving means of transport ready for unloading at the named place of destination or at the agreed point within that place, if any such point is agreed. The Seller bears all risks involved in bringing the goods to the named place. Delivery & Arrival at destination are the same.

DDP – Delivered Duty Paid (…named address/place of destination)

The Seller delivers the goods to the buyer when the goods are placed at the disposal of the buyer, cleared for import, on the arriving means of transport, ready for unloading, at the named place of destination. The Seller bears all costs and risks of moving the goods to destination, including the payment of Customs duties and taxes. There are limitations to DDP, as Customs formalities in the importing country may not readily allow the seller to be the legal importer of record; DAP or DPU are suggested Incoterms in such cases.

Ocean freight usage only

FAS - Free Alongside Ship (...named wharf/seaport)

The Seller delivers the goods to the buyer when the goods are cleared for export then placed alongside the ship nominated by the buyer at the named port of shipment. From that point, the Buyer bears all costs and risks of loss or damage.

FOB – Free On Board (…named wharf/seaport of shipment)

The Seller delivers the goods to the buyer on board the vessel nominated by the buyer, cleared for export, at the named wharf/seaport of shipment. From that point, the Buyer bears all costs and risks of loss or damage.

CFR – Cost And Freight (…named port of destination)

The Seller delivers the goods to the buyer on board the vessel, cleared for export to the named port of destination. The Buyer bears all risks of loss or damage once on board. Where more than one mode of transport is to be used, such as when goods are handed over to a carrier at a container terminal, it is highly recommended to use CPT instead.

CIF – Cost Insurance And Freight (…named port of destination)

The Seller delivers the goods to the buyer on board the vessel, cleared for export to the named port of destination. The Buyer bears all risks of loss or damage once on board. The Seller, however, purchases the cargo insurance to the named wharf/seaport of destination. Where more than one mode of transport is to be used, such as when goods are handed over to a carrier at a container terminal, it is highly recommended to use CPT instead. 

For further information on Incoterms contact your local Air & Ocean Team.

For more helpful articles see our on-going series of Freight Basics articles

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