Incoterms rules are international trade terms that buyers and sellers use to define responsibilities for tasks, costs, and risks during the sales and shipment of goods Internationally.

These rules are widely accepted by governments and legal authorities, helping to facilitate international trade and making them an integral part of global trade contracts.

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Incoterms rules help clarify when the seller’s costs and risks transfer to the buyer. They provide structure for smooth trade agreements and shipment processes. Some rules are specific to certain modes of transport, while others are designed for any mode of transportation. Understanding these differences is essential for avoiding confusion in international transactions.

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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.

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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.

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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 in the middle of the ocean and the parties involved are thousands of miles from the goods.

 

In the end, however, Incoterms boil down to three basic specifics:

Costs: who is responsible for the costs 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?

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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.

 

More often than not, buyers 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.

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EXW (EX-Works)

One of the simplest and most basic shipping arrangements places the minimum responsibility on the seller with greater responsibility on the buyer. In an EX-Works transaction, goods are basically made available for pickup at the shipper/seller's factory or warehouse and "delivery" is accomplished when the merchandise is released to the consignee's freight forwarder. The buyer is responsible for making arrangements with their forwarder for insurance, export clearance and handling all other paperwork.

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FOB (Free On Board)

One of the most commonly used and misused-terms, FOB stipulates that the shipper/seller uses his freight forwarder to move the merchandise to the port or designated point of origin. Though frequently used to describe inland movement of cargo, FOB specifically refers to ocean or inland waterway transportation of goods. "Delivery" is accomplished when the shipper/seller releases the goods to the buyer's forwarder. The buyer's responsibility for insurance and transportation begins at the same moment.

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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.

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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.

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CFR (Cost and Freight)

This term defines two distinct and separate responsibilities - one is dealing with the actual cost of merchandise "C" and the other "F" refers to the freight charges to a predetermined destination point. It is the shipper/seller's responsibility to get goods from their door to the port of destination. "Delivery" is accomplished at this time. It is the buyer's responsibility to cover insurance from the port of origin or port of shipment to buyer's door. Given that the shipper is responsible for transportation, the shipper also chooses the forwarder.

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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.

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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. As it 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.

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DAT (Delivered At Terminal) This term is used for any type of mode of shipment. The shipper/seller pays for carriage up to and including unloading 7 local charges at the importing terminal be it rail, road or air, except for costs related to import clearance, and final mile delivery, and assumes all risks up to the point that the goods are unloaded at the terminal.

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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.

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DDP (Delivered Duty Paid)

The DDP term tends to be used most in intermodal or courier-type shipments. Whereby, the shipper/seller is responsible for dealing with all the tasks involved in moving goods from the manufacturing plant to the buyer/consignee's door. It is the shipper/seller's responsibility to insure the goods and absorb all costs and risks including the payment of duty and customs charges fees in the destination country. ** Sales Taxes / VAT is not included in DDP terms **

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