Incoterms® (International Commercial Terms) are international trade rules developed and regularly updated by the International Chamber of Commerce since 1936. These aim to clarify the division of responsibilities between buyers and sellers in cross-border transactions. As the form of global trade evolves, the ICC revises the rules every 10 years on average. The latest version is Incoterms® 2020, which took effect on January 1, 2020. Historically, the rules have been revised nine times, in 1957, 1967, 1976, 1980, 1990, 2000, 2010, and 2020, and have gradually been improved to meet modern trade needs such as container transport and electronic documents.
Definition of Incoterms
Incoterms are a set of rules for international trade. They are used to define the responsibilities of buyers and sellers. They were created by the International Chamber of Commerce (ICC). These terms clearly define who is responsible for tasks such as shipping, insurance, customs clearance, and risk management. This makes international trade agreements more consistent and clear. They help prevent misunderstandings and arguments by ensuring that the exact words are used consistently in international sales contracts.
Key Takeaways
- Risk Transfer: Incoterms specify when the risk of loss or damage shifts from the seller to the buyer. This is crucial for determining liability during transit.
- Cost Responsibilities: They outline which party is responsible for various costs, including transportation, insurance, and customs duties.
- Delivery Points: Each term defines specific delivery locations, indicating where the seller’s responsibility ends and the buyer’s begins.
- Modes of Transport: Incoterms apply to different modes of transport, including sea, air, and land, with some terms being specific to certain transport methods.
- Standardization: They provide a standardized set of rules recognized globally, facilitating smoother international transactions and reducing misunderstandings.
- Updates: The terms are periodically updated (most recently in 2020) to reflect changes in trade practices and legal requirements.
The main functions of Incoterms
- Risk Allocation: Incoterms specify when the risk of loss or damage transfers from the seller to the buyer, helping both parties understand their exposure during transit.
- Cost Responsibilities: They outline which party is responsible for various costs, including transportation, insurance, and customs duties.
- Delivery Obligations: Incoterms define the point at which the seller fulfills their obligation to deliver the goods, which can vary based on the chosen term.
- Legal Clarity: They provide a common language for international trade, reducing misunderstandings and disputes between parties from different countries.
- Facilitation of Trade: By standardizing terms, Incoterms simplify negotiations and contracts, making international trade more efficient.
Applicability by Mode of Transport
Not all Incoterms are created equal; they’re divided into two categories based on their applicability:
Applicable to All Modes of Transport
These Incoterms work across air, road, rail, and sea shipping:
- EXW (Ex-Works)
- FCA (Free Carrier)
- CPT (Carriage Paid To)
- CIP (Carriage and Insurance Paid To)
- DAP (Delivered at Place)
- DPU (Delivered at Place Unloaded)
- DDP (Delivered Duty Paid)
Specific to Sea and Inland Waterways
These terms are exclusive to maritime transport:
- FAS (Free Alongside Ship)
- FOB (Free On Board)
- CFR (Cost and Freight)
- CIF (Cost, Insurance and Freight)
What are the 11 Incoterms?
1. EXW (EX Works) Incoterm
Ex Works (EXW) is an Incoterm that defines the minimum level of responsibility for the seller in an international transaction. Under EXW terms, the seller’s role is to make the goods available at their location—typically a warehouse or factory. The buyer assumes responsibility for all subsequent steps.
Seller’s Responsibilities:
- Make the goods available for pickup at their facility (e.g., factory, warehouse).
- Ensure the goods are appropriately packaged for transportation.
- Provide the necessary documents for the buyer to take possession of the property.
Buyer’s Responsibilities:
- Cover all costs and risks starting from the seller’s location.
- Arrange for transportation, including export and import clearance.
- Handle insurance, shipping, and any associated duties or taxes.
Advantages of EXW
For Sellers:
- Minimal risk: Responsibility ends once goods are made available.
- Simple logistics: No need to manage transport, customs, or overseas regulations.
For Buyers:
- Complete control: Buyers can select their carriers, routes, and schedules.
- Potential cost savings: With proper planning, buyers may reduce shipping costs by using preferred logistics providers.
When to Use EXW
- Experienced buyers who are familiar with international shipping procedures.
- Transactions where the buyer prefers to manage the entire logistics chain.
- Domestic pickups or situations where the buyer’s freight forwarder is local to the seller.
2. FCA (Free Carrier) Incoterm
Free Carrier (FCA) is an Incoterm that defines when the seller’s responsibility ends and the buyer’s begins in an international transaction. Under FCA, the seller delivers the goods, cleared for export, to a carrier or another party nominated by the buyer at a specified location. Once delivery is made, the buyer assumes responsibility for transportation, insurance, and import formalities.
Seller’s Responsibilities:
- Deliver the goods to the agreed-upon location (e.g., a shipping terminal, warehouse, or transport hub).
- Load the goods if delivery takes place at the seller’s premises.
- Clear the goods for export.
- Provide all necessary export documentation.
- Pay for any required pre-shipment inspection in the exporting country.
Buyer’s Responsibilities:
- Arrange and pay for the main international transportation.
- Handle import clearance, including duties and taxes.
- Cover costs of onward transport from the point of delivery to the final destination.
- Pay for any import-related inspections.
- Arrange insurance coverage for the shipment (if desired).
Advantages of FCA
- Flexibility in delivery location: Parties can agree on the most convenient delivery point, such as a port, airport, or even the seller’s warehouse.
- Shared responsibility: The seller handles export formalities while the buyer manages import-related tasks.
- Clear transfer of risk: The risk shifts from the seller to the buyer once the goods are delivered to the designated location.
When to Use FCA
- Transactions where the buyer wants control over the main carriage (international shipping).
- Scenarios where the seller is willing to handle export clearance but not the complexities of international freight.
- Shipments involving various modes of transport (e.g., truck to port to ship).
3. FAS (Free Alongside Ship) Incoterm
When it comes to the FAS Incoterm, the seller’s responsibility is to deliver the goods alongside the ship at the specified port of departure. At this point, the buyer assumes all costs and risks associated with loading the goods onto the ship, sea transportation, and any further logistics required to reach the final destination.
Seller’s Responsibilities
- Freight Costs: Covers transportation from the seller’s premises to the port of departure, delivering the goods alongside the vessel.
- Risk: Retains risk until the goods are delivered alongside the ship at the port of departure.
- Customs and Duties: Handles export formalities, including taxes and customs clearance at the origin.
Buyer’s Responsibilities
- Freight Costs: Covers loading the goods onto the ship, sea freight, and all subsequent transportation to the final destination.
- Risk: Assumes risk from the moment the goods are delivered alongside the ship.
- Customs and Duties: Manages import formalities, including duties, taxes, and customs clearance at the destination.
- Insurance: Optional; buyer arranges and pays for coverage if needed.
When to Use FAS
This Incoterm is most suitable for buyers who:
- Have a strong logistics network at the port of departure and prefer to control loading, transportation, and associated costs.
- Are shipping bulk or non-containerized cargo where delivering goods alongside the vessel is practical.
FAS provides flexibility for buyers while ensuring the seller handles transportation to the port.
4. FOB (Free on Board) Incoterm
Under the FOB Incoterm, the seller’s responsibility is to deliver the goods on board the buyer-nominated ship at the specified port of shipment. Once the goods are loaded onto the vessel, the buyer assumes all costs and risks for transportation, customs clearance, and import duties. The seller is also responsible for ensuring the goods are adequately packaged and ready for transport.
Seller’s Responsibilities
- Freight Costs: Covers transportation from the seller’s premises to the port of shipment and loading the goods onto the ship.
- Risk: Retains risk until the goods are loaded on board the ship.
- Customs and Duties: Handles export formalities, including taxes and customs clearance at the origin.
Buyer’s Responsibilities
- Freight Costs: Covers sea freight and all subsequent transportation to the final destination.
- Risk: Assumes risk from the moment the goods are loaded on board the ship.
- Customs and Duties: Handles import formalities, including duties, taxes, and customs clearance at the destination.
- Insurance: Arranges and pays for coverage if needed.
When to Use FOB
This Incoterm is suitable for buyers who:
- Have a strong relationship with a freight forwarder or carrier, allowing them to negotiate favorable shipping rates.
- Want control over the main transport leg of the shipment, including selecting carriers and managing costs.
- Are experienced in handling the complexities of sea freight and import logistics.
FOB offers a balance of shared responsibilities, with the seller ensuring the goods reach the vessel and the buyer managing the rest.
5. CFR (Cost and Freight) Incoterm
With the CFR (Cost and Freight) Incoterm, the seller is responsible for delivering the goods to the ship at the port of shipment and covering the cost of transportation to the port of destination, including export customs. The buyer assumes responsibility for all risks once the goods are loaded onto the ship, including import customs clearance, import duties, and cargo insurance, as well as transportation from the port of destination to the final delivery point.
Seller’s Responsibilities:
- Freight Costs: Covers transportation from the seller’s premises to the port of destination, including export customs.
- Risk: Retains risk until the goods are loaded on board the ship.
- Customs and Duties: Manages export formalities, including taxes and customs clearance at the origin.
Buyer’s Responsibilities:
- Freight Costs: Covers transportation from the port of destination to the final destination, including import customs and duties.
- Risk: Assumes risk from the moment the goods are loaded on board the ship.
- Customs and Duties: Handles import formalities, including duties, taxes, and customs clearance at the destination.
- Insurance: Obtains and pays for cargo insurance, if desired.
When to Use CFR
This Incoterm is most suitable for buyers who:
- Prefer the seller to handle the main transportation leg and export customs.
- Are equipped to manage risks, import duties, and transportation from the destination port.
- CFR is ideal for buyers who want to offload the logistics to the seller while taking responsibility for the final stretch of the journey.
6. CIF (Cost, Insurance, and Freight) Incoterm
Under the CIF Incoterm, the seller is responsible for delivering the goods on board a ship at the specified port of departure. The seller also arranges and covers the cost of transportation and insurance to the port of destination. However, the buyer assumes responsibility for all risks once the goods are loaded onto the ship, including customs clearance, duties and taxes, and inland transport fees at the destination.
One key aspect of CIF is that the seller must arrange insurance for the goods during transportation. The insurance coverage provided by the seller must comply with the Institute Cargo Clause (C), which offers minimum coverage for named risks, unless otherwise agreed. This coverage is more limited compared to the broader protection required under CIP, which requires the seller to arrange insurance under the Institute Cargo Clause (A), providing all-risk coverage unless the buyer specifies different requirements.
CIF simplifies the shipping process for the buyer since the seller is contractually obligated to handle the insurance coverage for the goods, reducing the buyer’s risk. Since the insurance cost is included in the price of the goods, the buyer does not need to arrange separate insurance. However, there may be cases where the insurance coverage provided does not meet the buyer’s expectations, potentially leading to disputes.
Seller’s Responsibilities:
- Freight Cost: Covers transportation from the seller’s premises to the port of destination, including export customs.
- Risk: Retains risk until the goods are loaded onto the ship.
- Customs and Duties: Responsible for export formalities, including taxes and customs clearance at the origin.
- Insurance: Must arrange and pay for insurance that meets the minimum coverage of the Institute Cargo Clause (C).
Buyer’s Responsibilities:
- Freight Cost: Covers transportation from the port of destination to the final delivery point, including import customs and duties.
- Risk: Assumes risk once the goods are loaded onto the ship, including inland transport at the destination.
- Customs and Duties: Manages import formalities, including duties, taxes, and customs clearance at the destination.
- Insurance: Some buyers choose to add additional insurance coverage.
When to Use CIF:
This Incoterm is most suitable for buyers who:
- Prefer the seller to handle the main transportation and insurance.
- Are equipped to manage risks, import duties, and transportation once the goods reach the destination port.
CIF is ideal for buyers who want to offload logistics and shipping arrangements, but still take on responsibility for the final leg of the journey.
7. CPT (Carriage Paid To) Incoterm
Under the CPT Incoterm, the seller is responsible for arranging and paying for the transportation of the goods to a specified place at the destination, including export clearance. The buyer, however, assumes responsibility for costs after the agreed destination point. Therefore, it is crucial to define the exact delivery location.
Risk transfers to the buyer when goods are delivered to the first carrier, while delivery obligations end at the agreed destination point. This means risk and delivery transfer at different locations. The buyer may arrange and pay for insurance coverage
Seller’s Responsibilities:
- Freight Cost: Covers transportation from the seller’s premises to the specified place at destination, including export clearance.
- Risk: Assumes risk once goods are delivered to first carrier.
- Customs and Duties: In charge of export formalities, including taxes and customs clearance at the origin.
- Insurance: The seller is not required to arrange insurance for the buyer under CPT.
Buyer’s Responsibilities:
- Freight Cost: Covers transportation from the specified destination to the final delivery point.
- Risk: Assumes risk from the moment the goods are handed over to the carrier at the port of origin, and is responsible for any further risks during transportation, including import duties, taxes, and insurance.
- Customs and Duties: Handles import formalities, including duties, taxes, and customs clearance at the destination.
- Insurance: Although insurance is not mandatory, some buyers prefer to obtain it for peace of mind.
When to Use CPT:
This Incoterm is most suitable for buyers who:
- Prefer the seller to handle the main transportation leg to a specified location at the destination.
- Are equipped to manage the risks and costs from the point of delivery to the final destination, including arranging insurance.
- Want to simplify export procedures by having the seller manage export customs and initial transportation.
CPT is ideal for buyers who want the convenience of having the seller handle most of the transportation but are prepared to assume responsibility for the goods once they are handed over to the carrier.
8. CIP (Carriage and Insurance Paid To) Incoterm
The CIP Incoterm outlines the seller’s obligation to arrange and pay for the transportation and insurance of goods to a specified place at the destination. Unlike other Incoterms, CIP requires the seller to provide comprehensive insurance coverage in compliance with the Institute Cargo Clauses (A), offering broader protection unless otherwise agreed.
The risk transfer occurs when the goods are delivered to the first carrier. From that point onwards, the buyer assumes all risks related to the transportation. However, the seller’s insurance arrangement provides added security for the buyer throughout the main transport leg.
Since the cost of insurance is included in the overall price, the buyer benefits from simplified logistics without the need to arrange or pay for separate insurance coverage. For the seller, their responsibility ends once the goods are delivered to the carrier and insurance is arranged, reducing their exposure to risk. However, this can lead to higher transaction costs for the buyer.
If a buyer prefers more control over insurance arrangements or finds the included policy unsuitable, the CPT Incoterm may offer a better alternative, as it excludes insurance coverage.
Seller’s Responsibilities:
- Freight Costs: Covers transportation from the seller’s premises to the specified place at the destination, including export customs.
- Risk: Retains risk until goods are delivered to first carrier.
- Customs and Duties: Manages export formalities, including taxes and customs clearance at the origin.
- Insurance: Provides all-risk insurance (Institute Cargo Clauses A) for the main transport leg.
Buyer’s Responsibilities:
- Freight Costs: Covers transportation from the specified place at the destination to the final destination.
- Risk: Assumes risk from the moment goods are handed over to the first carrier.
- Customs and Duties: Takes care of import formalities, including duties, taxes, and customs clearance at the destination.
- Insurance: Some buyers may choose to invest in additional insurance coverage.
When to Use CIP
This Incoterm is most suitable for buyers who:
- Want the seller to handle transportation and insurance arrangements for the main journey.
- Require the added security of all-risk insurance coverage (Institute Cargo Clauses A).
- Are prepared to manage risks, import duties, and transportation from the agreed delivery point.
CIP is ideal for buyers who value the convenience of a streamlined logistics process and comprehensive insurance coverage but are willing to pay the associated costs.
9. DPU (Delivered at Place Unloaded) Incoterm
With the DPU (Delivered at Place Unloaded) Incoterm, the seller is responsible for delivering the goods to an agreed place of delivery at the destination, including covering the costs and risks up to and including unloading. The seller also handles export formalities and costs. The buyer assumes responsibility for all risks and costs from the point of unloading to the final destination, including import formalities and duties.
The agreed place of delivery can be any location specified by the buyer, including their warehouse, terminal, or another designated facility. It is essential that this location is clearly defined in the contract to avoid any misunderstandings or disputes.
Seller’s Responsibilities:
- Freight Costs: Covers transportation from the seller’s premises to the specified place at the destination, including unloading.
- Risk: Retains risk from the seller’s premises to the specified place at the destination, including unloading.
- Customs and Duties: Handles export formalities, including taxes and customs clearance at the origin.
- Insurance: The seller can choose to insure themselves against potential losses during transportation or unloading, but this is entirely optional.
Buyer’s Responsibilities:
- Freight Costs: If the specified delivery point is not the final destination, the buyer covers onward transportation from the delivery point to the final location.
- Risk: Assumes risk from the specified place at the destination to the final destination.
- Customs and Duties: Handles import formalities, including duties, taxes, and customs clearance at the destination.
- Insurance: Buyers may choose to arrange insurance for risks beyond the designated location, for instance, for onward transportation.
When to Use DPU
This Incoterm is most suitable for buyers who:
- Want the seller to handle transportation and unloading at the agreed delivery point.
- Require delivery to a location where they can easily manage onward transportation.
- Are prepared to take responsibility for import formalities, duties, and transportation from the agreed delivery point to the final destination.
DPU is suitable for buyers who value the convenience of having the seller manage transportation and unloading at the agreed destination, whether it’s the final delivery point or a transit location, and are equipped to handle import formalities and any subsequent transportation, if needed.
10. DAP (Delivered at Place) Incoterm
With the DAP (Delivered at Place) Incoterm, the seller is responsible for delivering the goods to an agreed place of destination and making them available to the buyer. This destination can be a port, the buyer’s premises, or a third-party storage facility. The seller bears all costs and risks involved in transporting the goods to the agreed destination. However, the buyer is responsible for unloading the goods at the destination, as well as all costs and risks related to import customs clearance and duties.
Under DAP, the seller assumes most of the shipping-related responsibilities, including arranging transport from their premises to the agreed place of destination. The seller is also responsible for providing the buyer with the necessary documentation to facilitate customs clearance. Importantly, while the seller must provide these documents, the actual customs clearance process, duties, and taxes remain the buyer’s responsibility.
The main risk for the buyer under DAP lies in navigating the customs clearance process. Without adequate knowledge or an experienced customs broker, shipments may face delays, secondary investigations, or detention. In such cases, the buyer bears all associated costs, including potential demurrage charges, since import-related formalities fall under the buyer’s scope.
Seller’s Responsibilities:
- Freight Costs: Covers transportation from the seller’s premises to the agreed final destination, ready for unloading.
- Risk: Retains risk from the seller’s premises to the agreed final destination, ready for unloading.
- Customs and Duties: Handles export formalities, including taxes and customs clearance at the origin.
- Insurance: Sellers may choose to insure themselves against potential losses during transportation, but it is not mandatory.
Buyer’s Responsibilities:
- Freight Costs: If the specified delivery point is not the final destination, the buyer covers onward transportation from the delivery point to their final location.
- Risk: Assumes risk from the point of unloading at the agreed final destination.
- Customs and Duties: Responsible for import formalities, including duties, taxes, and customs clearance at the destination.
- Insurance: Buyers can obtain insurance for risks beyond the designated location, for instance, for onward transportation.
When to Use DAP
This Incoterm is most suitable for buyers who:
- Prefer the seller to manage transportation and delivery up to the agreed destination.
- Are equipped to handle the unloading process and import customs clearance.
- Have the expertise or support needed to manage import-related risks and costs.
DAP is suitable for buyers who want a simplified logistics process managed by the seller but are prepared to handle the final stages of the journey, including customs formalities and unloading.
11. DDP (Delivery Duty Paid) Incoterm
With the DDP (Delivered Duty Paid) Incoterm, the seller takes full responsibility for delivering goods to the final destination, including all transportation costs, customs clearance, and import duties. The buyer’s only responsibility is unloading the goods at the agreed destination, which is often their facility or warehouse but could also be a transit hub, storage facility, or another specified location. If the agreed destination is not the buyer’s final destination, further transportation would be the buyer’s responsibility.
Under DDP, the seller manages nearly every aspect of the logistics process, making it a low-risk option for the buyer. Although this can lead to higher prices for the buyer, it eliminates many of the challenges associated with international shipping.
Seller’s Responsibilities:
- Freight Costs: Covers transportation from the seller’s premises to the agreed final destination, ready for unloading.
- Risk: Retains risk from the seller’s premises to the agreed final destination, ready for unloading.
- Customs and Duties: Responsible for all export and import formalities, including duties, taxes, and customs clearance at the origin and destination.
- Insurance: While the seller is not obligated to insure the goods, they may choose to arrange cargo insurance due to their extensive responsibilities under this Incoterm.
Buyer’s Responsibilities:
- Freight Costs: None, except for the costs of unloading at the agreed final destination.
- Risk: Assumes risk only for unloading at the agreed final destination.
- Customs and Duties: The buyer is not responsible for customs clearance under DDP.
When to Use DDP
This Incoterm is most suitable for buyers who:
- Prefer the seller to handle all aspects of transportation, customs clearance, and import duties.
- Want to minimize their own involvement in the shipping process, especially with customs formalities.
- Are comfortable with potentially higher costs in exchange for a simplified logistics process.
DDP is suitable for buyers who value a seamless delivery process and are willing to pay a premium for reduced risk and convenience.
Why Are Incoterms Used?
1. Clarity and Consistency
Incoterms create a universal language for international trade. They provide a standardized framework that allocates tasks, costs, and risks between the buyer and the seller. This helps avoid misunderstandings and reduces the likelihood of legal disputes—especially important when dealing with different languages, legal systems, and business cultures.
2. Defined Responsibilities
Incoterms spell out which party is responsible for the following:
- Transportation: Who arranges and pays for shipping? Who handles loading and unloading?
- Insurance: Who is responsible for insuring the goods during transit?
- Documentation: Who must obtain export/import licenses and other required paperwork?
- Customs Clearance: Who handles duties, taxes, and customs formalities?
3. Risk Management
Each Incoterm defines the precise point at which the risk of loss or damage transfers from the seller to the buyer. This clarity is crucial for determining liability and protecting both parties in the event of unexpected events during transit.
4. Cost Allocation
Incoterms specify who pays for which parts of the delivery process. This helps both parties plan, price, and budget more effectively, especially when dealing with complex and cross-border shipping logistics.
5. Easier Negotiations
Using Incoterms streamlines contract negotiations by providing both parties with a clear starting point for negotiations. With predefined responsibilities, it’s easier for buyers and sellers to reach agreements without having to define every detail from scratch.
6. Legal Certainty
While Incoterms aren’t laws themselves, they become legally enforceable when included in a sales contract. Their global recognition makes them a reliable legal reference in case of disputes or claims.
Conclusion
Incoterms simplify the complexities of international shipping by offering a clear, standardized structure for trade. They help ensure transparency, minimize miscommunication and protect the interests of both parties in cross-border transactions. Whether you’re new to global trade or managing complex logistics daily, understanding and correctly using Incoterms is essential to smooth and successful international business.
