International Commercial Terms ("Incoterms") are three letter abbreviated commercial terms pre-defined by the International Chamber of Commerce, which are used mostly in international commercial transactions and procurement processes. These rules are much help in defining primarily the main objectives and issues of the transaction, such as task, cost, delivery or risk. By themselves they do not conclude a contract, for there are other issues to be addressed such as price payable, governing law, etc. They are intended to reduce or remove altogether uncertainties arising from different interpretation of the rules in different countries. As such they are regularly incorporated into sales contracts worldwide.
The first edition of rules was published in 1923 by the ICC. The eighth version, which is used currently has been active since 2010. A new revision of Incoterms is intended to be published by 2020.
The 11 pre-defined terms of Incoterms 2010 are subdivided into two categories based only on method of delivery. The larger group of seven may be used regardless of method of delivery, with the smaller group of four being applicable only to transactions that involve transportation by water. Under Incoterms 2010 "delivery" is defined as such: the point in the transaction where "the risk of loss or damage passes from the seller to the buyer."
I. Rules for Any Mode of Transport
EXW – EX Works (Named Place of Delivery)
Seller delivers the goods at disposal of buyer at seller's premises. (without loading) Long held as the most preferable term for those new-to-export because it represents the minimum liability to the seller. On these routed transactions, the buyer has limited obligation to provide export information to the seller.
FCA – Free Carrier (Named Place of Delivery)
Seller delivers the goods to the carrier or another person nominated by the buyer at the seller's premises or another named place. The parties are well advised to specify as clearly as possible the point within the named place of delivery, as the risk passes to the buyer at that point.
CPT – Carriage Paid To (Named Place of Destination)
Seller delivers goods to the carrier at an agreed place, shifting risk to the buyer, but seller must pay cost of carriage, including if applicable export clearance costs, to the named place of destination.
CIP – Carriage and Insurance Paid To (Named Place of Destination)
Seller delivers goods to the carrier at an agreed place, shifting risk to the buyer, but seller pays carriage and insurance to the named place of destination. This term is broadly similar to the above CPT term, with the exception that the seller is required to obtain insurance for the goods while in transit.
DAT – Delivered at Terminal (Named Terminal at Port or Place of Destination)
Seller bears cost, risk and responsibility until goods are unloaded (delivered) at named quay, warehouse, yard, or terminal at destination. Demurrage or detention charges may apply to seller. Seller clears goods for export, not import. All charges after unloading (for example, import duty, taxes, customs and on-carriage) are to be borne by buyer.
DAP – Delivered at Place (Named Place of Destination)
Seller delivers when the goods are placed at the disposal of the buyer on the arriving means of transport ready for unloading at the named place of destination. The seller bears all risks involved in bringing the goods to the named place. All necessary legal formalities in the exporting country are completed by the seller at his own cost and risk to clear the goods for export. After arrival of the goods in the country of destination, the customs clearance in the importing country needs to be completed by the buyer at his own cost and risk, including all customs duties and taxes.
DDP – Delivery Duty Paid (Named Place of Destination)
Seller bears cost, risk and responsibility for cleared goods at named place of destination at buyer's disposal. Buyer is responsible for unloading. Seller is responsible for export and import clearance, duties and taxes so buyer is not "importer of record".
II. Rules for Sea and Inland Waterway Transport
It is important to note that these terms are generally not suitable for shipments in shipping containers; the point at which risk and responsibility for the goods passes is when the goods are loaded on board the ship, and if the goods are sealed into a shipping container it is impossible to verify the condition of the goods at this point.
FAS – Free Alongside Ship (Named Port of Shipment)
Risk passes to buyer, including payment of all transportation and insurance costs, once delivered alongside the ship (realistically at named port terminal) by the seller. The export clearance obligation rests with the seller, the buyer bears all costs from that moment onwards.
FOB – Free on Board (Named Port of Shipment)
Risk passes to buyer, including payment of all transportation and insurance costs, once delivered on board the ship by the seller. Buyer bears all costs from that moment onwards, which is a step further than FAS.
CFR – Cost and Freight (Named Port of Destination)
Seller delivers goods and risk passes to buyer when on board the vessel. Seller arranges and pays cost and freight to the named destination port.
CIF – Cost, Insurance and Freight (Named Port of Destination)
Seller delivers the goods on board the vessel or procures the goods already so delivered. The risk of loss of or damage to the goods passes when the goods are on board the vessel. The seller must contract for and pay the costs and freight necessary to bring the goods to the named port of destination.
'The seller also contracts for insurance cover against the buyer's risk of loss of or damage to the goods during the carriage. The buyer should note that under CIF the seller is required to obtain insurance only on minimum cover. Should the buyer wish to have more insurance protection, it will need either to agree as much expressly with the seller or to make its own extra insurance arrangements.
The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.