The Incoterms (International Commercial Terms) are pre-defined commercial terms published by the International Chamber of Commerce (ICC). Three-letter standard trade terms (e.g. FOB, CFR, CIF) are commonly used in international commercial transactions for the sale of goods. The Incoterms rules are intended to communicate the respective obligations tasks, costs, and risks that are associated with the transportation and delivery of goods. They define the trade contract liabilities between the buyer and the seller (the supplier and the consumer). Each Incoterm refers to a particular type of agreement for the purchase and shipping of goods internationally.
The Incoterms rules are accepted by governments, legal authorities, and practitioners worldwide. They are intended to reduce or eliminate uncertainties that arise from different interpretation of the rules in different countries.
The Incoterms also deal with the documentation required for global trade; they specify which parties are responsible for which documents since requirements vary much between countries. Two items, however, are standard: the Commercial Invoice and Packing List. Their purpose is to divide transaction costs and responsibilities between buyer and seller.
The Incoterms were first published in 1936; they are reviewed periodically to keep up with changes in the international trade needs. The Incoterms were revised in 1953, 1967, 1976, 1980, 1990, 2000, bringing some changes to a few terms. The latest version of Incoterms, Incoterms® 2010, was launched in September 2010. The Incoterms are most frequently classified by category. The Incoterms beginning with F refers to shipments where the primary cost of shipping is not paid for by the seller. The Incoterms beginning with C deal with shipments where the seller pays for shipping. E-terms occur when a seller’s responsibilities are fulfilled when goods are ready to depart from their facilities. D-terms cover shipments where the shipper/seller’s responsibility ends when the goods arrive at some specific point.
1 – TERMS FOR ANY TRANSPORT MODE
- EXW – EX WORKS (… named place of delivery)
- The Seller’s only responsibility is to make the goods available at the Seller’s premises. The Buyer bears full costs and risks of moving the goods from there to destination.
- FCA – FREE CARRIER (… named place of delivery)
- The Seller delivers the goods, cleared for export, to the carrier selected by the Buyer. The Seller loads the goods if the carrier pickup is at the Seller’s premises. From that point, the Buyer bears the costs and risks of moving the goods to destination.
- CPT – CARRIAGE PAID TO (… named place of destination)
- The Seller pays for moving the goods to destination. From the time the goods are transferred to the first carrier, the Buyer bears the risks of loss or damage.
- CIP – CARRIAGE AND INSURANCE PAID TO (… named place of destination)
- The Seller pays for moving the goods to destination. From the time the goods are transferred to the first carrier, the Buyer bears the risks of loss or damage. The Seller, however, purchases the cargo insurance.
- DAT – DELIVERED AT TERMINAL (… named terminal at port or place of destination)
- The Seller delivers when the goods, once unloaded from the arriving means of transport, are placed at the Buyer’s disposal at a named terminal at the named port or place of destination. “Terminal” includes any place, whether covered or not, such as a quay, warehouse, container yard or road, rail or air cargo terminal. The Seller bears all risks involved in bringing the goods to and unloading them at the terminal at the named port or place of destination.
- DAP – DELIVERED AT PLACE (… named place of destination)
- The Seller delivers when the goods are placed at the Buyer’s disposal on the arriving means of transport ready for unloading at the names place of destination. The Seller bears all risks involved in bringing the goods to the named place.
- DDP – DELIVERED DUTY PAID (… named place)
- The Seller delivers the goods -cleared for import – to the Buyer at destination. The Seller bears all costs and risks of moving the goods to destination, including the payment of Customs duties and taxes.
2 – MARITIME-ONLY TERMS
- FAS – FREE ALONGSIDE SHIP (… named port of shipment)
- The Seller delivers the goods to the origin port. From that point, the Buyer bears all costs and risks of loss or damage.
- FOB – FREE ON BOARD (… named port of shipment)
- The Seller delivers the goods on board the ship and clears the goods for export. From that point, the Buyer bears all costs and risks of loss or damage.
- CFR – COST AND FREIGHT (… named port of destination)
- The Seller clears the goods for export and pays the costs of moving the goods to destination. The Buyer bears all risks of loss or damage.
- CIF – COST INSURANCE AND FREIGHT (… named port of destination)
- The Seller clears the goods for export and pays the costs of moving the goods to the port of destination. The Buyer bears all risks of loss or damage. The Seller, however, purchases the cargo insurance.
The brief definitions above were paraphrased from the ICC publication, Incoterms 2010: ICC Official Rules for the Interpretation of Trade Terms, effective January 1, 2011. Valid through 2016.