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INCOTERMS 2010 were created primarily for people inside the world of global trade. Outsiders frequently find them difficult to understand. Seemingly common words such as "responsibility" and "delivery" have different meanings in global trade than they do in other situations. They were designed to create a bridge between different members of the industry by acting as a uniform language each can use.
Each INCOTERM refers to a type of agreement for the purchase and shipping of goods internationally. There are 11 different terms, each of which identifies the parties to a transactions rights, duties, responsibilities and liabilities during international transport.
INCOTERMS also deal with the documentation required for global trade, specifying which parties are responsible for which documents. Determining the paperwork required to move a shipment is an important job, since requirements vary so much between countries. Two items however are standard: the commercial invoice and the packing list.
In global trade, "delivery" refers to the seller fulfilling the obligation of the terms of sale or to completing a contractual obligation. "Delivery" can occur while the merchandise is on a vessel on the ocean and the parties involved are thousands of miles from the goods. In the end, however, Incoterms boil down to a few basic specifics:
Costs: who is responsible for the expenses involved in a shipment at a given point in the shipment's journey?
Control: who owns the goods at a given point in the journey?
Liability: who is responsible for paying for damages to goods at a given point in a shipment's transit?
It is essential for shippers to know the exact status of their shipments in terms of ownership and responsibility. It is also vital for sellers & buyers to arrange insurance on their goods while the goods are in their "legal" possession. Lack of insurance can result in wasted time, lawsuits, and broken relationships.
Often companies like to be in control of their freight during transport. That being the case, sellers of goods might choose to sell CIF, which gives them a good grasp of shipments moving out of their country, and buyers may prefer to purchase FOB, which gives them a tighter hold on goods moving into their country, this decision will depend on terms included in the contract of sale.
INCOTERMS are most frequently listed by category.
FOB (Free On Board) One of the most commonly used and misused-
FCA (Free Carrier) In this type of transaction, the seller is responsible for arranging transportation, but he is acting at the risk and the expense of the buyer. Where in FOB the freight forwarder or carrier is the choice of the buyer, in FCA the seller chooses and works with the freight forwarder or the carrier. "Delivery" is accomplished at a predetermined port or destination point and the buyer is responsible for procuring insurance.
FAS (Free Alongside Ship) In these transactions, the buyer bears all the transportation costs and the risk of loss of goods. FAS requires the shipper/seller to clear goods for export, which is a reversal from past practices. Companies selling on these terms will ordinarily use their freight forwarder to clear the goods for export. "Delivery" is accomplished when the goods are turned over to the Buyers Forwarder for insurance and transportation.
CFR (Cost and Freight) This term defines two distinct and separate responsibilities -
CIF (Cost, Insurance and Freight) This arrangement similar to CFR, but instead of the buyer insuring the goods for the maritime phase of the voyage, the shipper/seller will insure the merchandise. In this arrangement, the seller usually chooses the forwarder. "Delivery" as above, is accomplished at the port of destination.
CPT (Carriage Paid To) In CPT transactions the shipper/seller has the same obligations found with CIF, with the addition that the seller has to buy cargo insurance, naming the buyer as the insured while the goods are in transit.
CIP (Carriage and Insurance Paid To) This term is primarily used for multimodal transport. Asit relies on the carrier's insurance, the shipper/seller is only required to purchase minimum coverage. When this particular agreement is in force, Freight Forwarders often act in effect, as carriers. The buyer's insurance is effective when the goods are turned over to the Forwarder.
DAT (Delivered At Terminal) This term is used for any type of shipment. The shipper/seller pays for carriage to the importing terminal, except for costs related to import clearance, and assumes all risks up to the point that the goods are unloaded at the terminal.
DAP (Delivered At Place) DAP term is used for any type of shipment. The shipper/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) The DDP term tends to be used in intermodal or courier-
International Commercial Terms