What are INCOTERMS?

Incoterms are a set of simple three letter codes which represent the different ways international shipments may be organized. They allow sellers and buyers from different cultures and legal systems to decide at what point the ownership and paying for freight, insurance and customs costs transfer from one to the other.

Who decides what INCOTERMS mean?

The International Chamber of Commerce has set up strict definitions for each incoterm. Choosing a suitable incoterm allows the buyer and seller to negotiate a price best suited to their needs and to be confident that there will be no confusion over who pays the costs. To ensure that the latest version is being used shipping contracts should refer to “INCOTERMS 2000”.

When should INCOTERMS be used?

It is not compulsory to use incoterms. However when things go wrong and disputes arise it is much easier to sort out who is responsible for what if incoterms have been written into the shipping contract. To be safe, incoterms should be decided upon in the negotiation phase of any international purchasing contract.

How do INCOTERMS work?

Each INCOTERM is a three letter acronym related to where the seller’s responsibility ends. They should be written into the purchasing or shipping contracts. Some incoterms require the changeover point to be named. As well as buyer and sellers there are “carriers”. They are the people who have a contract to transport the goods by land, sea, air or a combination of modes. A seller will be given a bill of lading, way bill or carrier’s receipt, that document can be used to prove that the goods have been taken on by the carrier.

There are four groups of INCOTERMS – “E”, “F”, “C” & “D”

E – group: 

Used where the seller does not want to arrange transport.

EXW – Ex-Works:

Means the seller’s only responsibility is to make the goods available at the seller’s premises, i.e., the works or factory. The seller is not responsible for loading the goods on the vehicle provided by the buyer unless otherwise agreed. The buyer bears the full costs and risk involved in bringing the goods from there to the desired destination. 
“Ex works” represents the minimum obligation of the seller.

F – group: 

Used where the seller can arrange some transport within his/her own country.

FCA– Free Carrier:

This term has been designed to meet the requirements of multi-modal transport, such as container or roll-on, roll-off traffic by trailers and ferries. The seller fulfils his/her obligations when the goods are delivered to the custody of the carrier at a named point. If no precise point can be named at the time of the contract of sale, the parties should refer to the place where the carrier should take the goods into its charge. The risk of loss or damage to the goods is transferred from seller to buyer at that time.

FAS – Free Alongside Ship:

Requires the seller to deliver the goods alongside the ship on the quay. From that point on, the buyer bears all costs and risks of loss and damage to the goods. F.A.S. requires the buyer to clear the goods for export and pay the cost of loading the goods.

FOB – Free On Board vessel, Named ocean port of shipment:

The goods are placed on board the ship by the seller at a port of shipment named in the sales agreement. The risk of loss of or damage to the goods is transferred to the buyer when the goods pass the ship’s rail (i.e., off the dock and placed on the ship). 
The seller pays the cost of loading the goods.

C – group: 

Used where the seller can arrange and pay for most of the freight charges up to the foreign country.

CFR – (or C&F) Cost and Freight, Named ocean port of destination:

Requires the seller to pay the costs and freight necessary to bring the goods to the named destination, but the risk of loss or damage to the goods, as well as any cost increases, are transferred from the seller to the buyer when the goods pass the ship’s rail in the port of shipment. Insurance is the buyer’s responsibility.

CIF – Cost Insurance and Freight, Named ocean port of destination:

This is CFR with the additional requirement that the seller procure transport insurance against the risk of loss or damage to goods. The seller must contract with the insurer and pay the insurance premium. Insurance is generally important in international shipping because transport companies have restricted liability for loss or damage.

CPT – Freight/Carriage Paid To,Named place or port of destination:

This term means the seller pays the freight for the carriage of the goods to the named destination. The risk of loss or damage to the goods and any cost increases transfers from the seller to the buyer when the goods have been delivered to the custody of the final carrier, and not at the ship’s rail. Accordingly, “freight/carriage paid to” can be used for all modes of transportation, including container or roll-on roll-off traffic by trailers and ferries. When the seller is required to furnish a bill of lading, way bill, or carrier receipt, the seller duly fulfils its obligation by presenting such a document issued by the person contracted with for carriage to the main destination.

CIP – Carriage and Insurance Paid, Named place or port of destination:

This term (also abbreviated CIP) is the same as “freight/carriage paid to” but with the additional requirement that the seller has to procure transport insurance against the risk of loss or damage to the goods during the carriage. The seller contracts with the insurer and pays the insurance premium.

D – group: 

Used where the seller can pay for most of the delivery charges to the destination country.

DAF – Delivered At Frontier, Named place of destination, by land, not unloaded:

This term means that the seller’s obligations are fulfilled when the goods have arrived at the frontier but before the customs border of the country named in the sales contract. The term is primarily used when goods are carried by rail or truck. The seller bears the full cost and risk in delivering the goods up to this point, but the buyer must arrange and pay for the goods to clear customs.

DES – Delivered Ex-Ship, Named port of destination, not unloaded:

This term means the seller makes the goods available to the buyer on board the ship at the destination named in the sales contract. The seller bears the full cost and risk involved in bringing the goods there. The cost of unloading the goods and any customs duties must be paid by the buyer.

DEQ – Delivered Ex-Quay, Named port of destination, unloaded, not cleared:

This term means the seller has agreed to make the goods available to the buyer on the quay or the wharf at the destination named in the sales contract. The seller bears the full cost and risks in delivering the goods to that point including unloading. There are two variations of ex quay contracts: “ex quay duty paid” and “ex quay duty on buyer’s account.” In the first, the duty is paid by the seller. In the second, the duty also is paid by the seller, but the buyer must reimburse the seller.

DDU – Delivered Duty Unpaid, Named place of destination, not unloaded, not cleared:

This term Delivered duty paid or Under these terms, the seller fulfils his obligation to deliver when the goods have been available to the buyer uncleared for import at the point or place of the named destination. The seller bears all costs and risks involved in bringing the goods to the point or place of named destination. There is no obligation for import clearance.       

DDP – Delivered Duty Paid, Named place of destination, not unloaded, cleared:

This term represents the seller’s maximum obligation. The term “DDP.” is generally followed by words indicating the buyer’s premises. It notes that the seller bears all risks and all costs until the goods are delivered. This term can be used irrespective of the mode of transport. If the parties wish to make clear that the seller is not responsible for certain costs, additional word should be added (for example, “delivered duty paid exclusive of VAT and/or taxes”).

NB: This page has been set out as a guide only. Full details are in the above mentioned publication available from your local Chambers of Commerce.
Source: International Chamber of Commerce Publication “INCOTERMS 2000”