Incoterms are terms of trade that clarify the responsibilities of all parties when shipping products from seller to buyer. These rules cover international trade law and provide clarity on all international transactions. In addition, the incoterms also clarify the costs, risks, allocation of tasks, etc. Incoterms are accepted by governments and legal authorities worldwide and are of great importance when drawing up sales contracts.
The ICC, which stands for International Chamber of Commerce, has published the incoterms. The ICC was founded in 1919 and the first Incoterms followed soon after. These were in fact published as early as 1936. The most recent version of Incoterms is from 2020.
Table of contents
The different types of incoterms
There are 11 Incoterms, these Incoterms are divided into different categories. Categories are based on cost, risk and delivery location. For each category, we also look at different situations, such as when the cargo is transported by sea. The categories are E, F, C and D.
Category E (EXW)
The buyer bears the responsibility within category E (EXW). The sole responsibility of the seller is to ensure that the products arrive at the agreed delivery address.
Category F (FCA, FAS and FOB)
In category F, the method of delivery and handling agreed with the customer in advance is the responsibility of the seller. After that, the buyer takes over the responsibility.
Category C (CFR, CIF, CPT and CIP)
The seller is responsible for all costs until the goods have arrived at an agreed destination, at category C. When the goods are subsequently transported, the buyer bears the risk.
Category D (DPU, DAP and DDP)
All obligations within category D are dependent on the destination(s).
The Incoterms
EXW – Ex Works
In Incoterms EXW, the buyer bears almost all costs and risks of the entire shipping process. Giving the buyer access to the goods is the seller’s main task. Once the buyer has access to goods, the buyer is responsible for transporting the goods.
FCA – Free Carrier
FCA is a very flexible condition. At FCA, it is the buyer’s responsibility to arrange the main transport. The seller simply has to deliver the goods to the buyer’s carrier.
CPT – Carriage Paid To
With CPT, the same responsibilities apply to the buyer as with FCA. However, there is one difference; the seller pays the delivery costs. However, it is still the seller’s responsibility to deliver the goods to the buyer’s carrier.
CIP – Carriage and Insurance Paid To
CIP again has the same vendor responsibilities as CPT, again with one difference. With CIP, the seller pays for insurance in addition to the cost of delivery of the goods. However, this need only be the minimum coverage. Does the buyer want broad insurance? Then the buyer must pay this himself.
DAP – Delivered at Place
At DAP the seller bears the costs and risks of transporting the goods. The goods must be transported to an address agreed in advance. When the goods have arrived at the address and are ready to be unloaded, the goods are classified as delivered.
DPU – Delivered at Place Unloaded
The Incoterm Delivered at Place establishes that all costs and risks must be assumed by the seller. The unloading of the goods is also the responsibility of the seller, contrary to the Incoterm DAP.
DDP – Delivery Duty Paid
In addition to the seller being responsible for the transport of the goods, the seller must also ensure that the goods have been cleared for transport and that the import duties have been paid. The seller is not responsible for unloading the goods, the buyer is.
Incoterms for waterborne transport
FAS – Free Alongside Ship
With the Iincoterm Free Alongside Ship, the seller delivers the goods to the quay of the port near the ship. The goods must be cleared for export. Until the goods are delivered to the quay beside the ship, the seller bears all costs and risks of transport. Loading the ship is the responsibility of the buyer, who then takes over the risk. The buyer must also take care of the import and export clearance.
FOB – Free on Board
Free On Board is an Incoterm that states that the seller is responsible for the transport and loading of the goods on the ship. Until all goods are on board the vessel the seller bears all costs and risks of transportation. The seller must also arrange export clearance under this Incoterm. Once the goods are on board the ship, the buyer bears all responsibilities.
CFR – Cost and Freight
Under the Incoterm CFR, the seller is responsible for transporting the goods and for loading them onto the ship. The responsibility is transferred to the buyer once all the goods are loaded on the ship, the seller is only responsible for the transport of the goods to the destination port.
As with FOB, the responsibilities are for the buyer once the goods are on board the ship. The seller basically has the same responsibilities as with FOB, but must also pay the cost of transportation.
CIF – Cost Insurance and Freight
Cost Insurance and Freight works the same as CFR, the difference being that with CIF the seller also has to insure the goods and therefore also has to pay these costs. However, the seller is only obliged to pay the minimum coverage as with the Incoterm CIP. Does the buyer want a broader insurance with maximum coverage? Then the buyer must pay this himself.
What is the difference between all Incoterms?
The distinction between the above circumstances is based on who is responsible for the expenditure and who bears the risk. Export papers, transport to and from the port, loading and unloading of trucks or ships and import tariffs are all examples of this.
As you move down the list of Incoterms, the costs slowly shift from the buyer to the seller. For example, in category E the buyer is fully responsible for all costs and in category D, under Incoterm DDP the seller is. This also applies to the risk of transporting the goods. With category E the full risk of transport lies with the buyer and with Incoterm DDP the full risk lies with the seller.
If you want to know which Incoterm is best suited to your situation, you should answer these questions for yourself:
- What method is used to deliver the goods? Is the cargo transported by land, air or sea.
- What is the nature of my relationship with the other party or customer? For one-off or occasional transactions, it is recommended to use Incoterms from category F.
- What level of control do you want to maintain yourself? If control is not so important to you, then go for category E.
