Incoterms

Incoterms

Contents

When you and the buyer agree on transport arrangements, it's a good idea to use International Commercial Terms ('Incoterms'). These are a set of 3-letter standard trade terms most commonly used in the international contracts for the sale of goods.

They were published by the International Chamber of Commerce (ICC) to standardise the meaning of the terms used in foreign trade. They define the respective obligations, costs and risks involved in the transportation of the goods. The most recent edition is called 'Incoterms 2010'. You can choose one of these terms and adopt it in your contract.

The obligations, costs and risk under the various Incoterms for the seller are set out below. They state the point of delivery of the goods. This is where the risk of the goods being lost or damaged passes from you to the buyer. If the goods are damaged while you bear the risk, you must replace them with other goods. If you don't, you'll be in breach of contract.

If the goods are damaged after the risk has passed to the buyer, the buyer bears the loss and must still pay you for the goods. If they don't, they'll be in breach of contract.

You should make sure that you have insurance cover while the goods are at your risk. Depending on the Incoterm used, you may also have an obligation to pay for insurance for the goods when they're at the buyer's risk.

Incoterms 2010 classes

These terms assume that you're the seller. Incoterms 2010 are grouped into 2 classes, with sub-groups of terms:

1. Terms for any transport mode. These are suitable where the goods are being delivered to an inland depot as well as to a port.

2. Sea- and inland-only waterway terms. These are suitable where the goods are being delivered at a port, as they refer to goods being placed on board or alongside a ship.

In these sub-groups, the point up to which you pay the costs and at which you pass the risk in the goods to the buyer varies:

  • E Terms: The only E Term is Ex Works. Here you make the goods available at your premises. You don't pay the costs of transportation. The risk passes to the buyer at this point.
  • F Terms: You bear the costs and risk as far as a delivery point in your country. The buyer pays the main transport costs including the sea freight.
  • C Terms: You pay the cost of the main journey, including the sea freight up to a point in the buyer's country. However, you pass the risk to the buyer when you deliver the goods to the shipping company ('carrier') in your country.
  • D Terms: You pay the costs up to a named destination in the buyer's country, which could be as far as the buyer's premises. You also bear the risk until the goods reach this destination.

Using Incoterms in a sales contract or purchase order

If you use Incoterms in the sales contract or purchase order, it's advisable to identify the appropriate Incoterm Rule (e.g. FCA, CPT, etc.), state 'Incoterms 2010' and specify the place or port for delivery as clearly and precisely as possible.

Terms for any transport mode

EXW - Ex Works (... named place of delivery)

You're only responsible to make the goods available at your own premises. The buyer would be liable to pay the full costs and bear the full risk of moving the goods from there to the destination. This term is commonly used when quoting a price.

FCA - Free Carrier (... named place of delivery)

You'd be responsible to deliver the goods, cleared for export, to the carrier that the buyer chooses. You may have to transport them to the carrier's depot. You'd be responsible to load the goods onto the carrier if they're picked up at your premises. Once you've delivered the goods to the carrier, the buyer would be liable to pay the full costs and bear the full risk of moving the goods to the destination. This term is commonly used for containers travelling by more than one mode of transport, as it's suitable when the goods are delivered at an inland depot as well as at a port.

CPT - Carriage Paid To (... named place of destination)

You'd be responsible for paying to move the goods to the destination in the buyer's country, including the sea freight. However, the risk of loss or damage to the goods passes to the buyer when you deliver the goods to the carrier in your country.

CIP - Carriage and Insurance Paid To (... named place of destination)

You'd be responsible for paying to move the goods to the destination in the buyer's country, including the sea freight. You're also responsible for paying for the cargo insurance. However, the risk of loss or damage to the goods passes to the buyer when you deliver the goods to the carrier in your country.

DAT - Delivered At Terminal (... named terminal at port or place of destination)

You bear the transport costs and risk until the goods are unloaded from the carrier in the buyer's country and placed in the buyer's care. This would be at a named terminal or named port in the buyer's country. 'Terminal' would include any place, whether it was covered or not, such as a quay, warehouse, container yard or road, rail or air cargo terminal.

DAP - Delivered At Place (... named place of destination)

You deliver when the goods are placed in the buyer's care, usually at the buyer's premises. You pay the costs to this point, but the buyer must arrange to clear the goods for import and pay those costs. You bear the risk until you deliver the goods to the named destination.

DDP - Delivered Duty Paid (... named place)

You deliver the goods that are cleared for import to the buyer at the named destination. You'd be responsible for all costs and the risk of moving the goods to the named destination, including paying customs duties and taxes. This is the most expensive term for the seller, and is generally only used when a small quantity of goods is sent by air.

Sea And Inland Waterway Only Terms

FAS - Free Alongside Ship (... named port of shipment)

You deliver the goods to the named shipment port in your country and clear them for export. The buyer would then be responsible for the costs and risk involved in loading the goods onto the ship and transporting them.

FOB - Free On Board (... named port of shipment)

You deliver the goods and load them onto the specified ship. You also clear the goods for export. From that point, the buyer bears all costs and risk.

CFR - Cost and Freight (... named port of destination)

You deliver the goods and load them onto the specified ship. You also clear the goods for export. You're responsible for paying the full costs until the goods arrive at the named destination in the buyer's country. The buyer would be responsible for all risk of loss or damage after the goods have been placed on board the ship in your country.

CIF - Cost Insurance and Freight (... named port of destination)

You deliver the goods and load them onto the specified ship. You also clear the goods for export. You'd be responsible to pay the full costs until the goods arrive at the named destination in the buyer's country, and for arranging and paying for insurance up to that destination. The buyer would be responsible for all risk of loss or damage after the goods have been placed on board the ship in your country.