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This bitesize guide provides clear and important information about Incoterms.
Before we get started have a look at our frequently asked questions. 

What is an Incoterm?

Incoterms (which stand for International Commercial Terms) are 11 international rules created by by the International Chamber of Commerce (ICC) that are accepted by governments, legal authorities and practitioners worldwide for as the standard contract term used in sales contracts with importing/exporting. Incoterms define responsibility and liability for shipment of the goods. In plain English – how far along the process will the supplier ensure that the goods are moved, and at what point does the buyer take over the shipment process.

What are each of the Incoterms?

There are 11 Incoterms, each has a three digit code followed by the full name of the Inocterm:

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

FAS Free Alongside Ship

FOB Free on Board

CFR Cost and Freight

CIF Cost, Insurance & Freight

Why will I need Incoterms after the transition period?

After the transition period your existing Incoterms may not be right for your business as they could confer new obligations such as registering for VAT in a foreign country. It is therefore advisable to review your existing contacts to see if they contain Incoterms and assess whether these will need to be updated.

Do Incoterms change?

Yes. Regardless of Brexit, Incoterms are revised in ten-year intervals to reflect international commercial practice. The last revision effected in Incoterms 2020.

Are Incoterms legally binding?

Incoterms are a legally-enforceable part of a sales contract and can be used in the resolution of disputes that go to litigation.

How can I find out what Incoterms I am currently using?

You should review your existing contracts to see if they contain Incoterms and assess whether these will need to be updated, you may find these written on your invoice, alternatively you can contact your supplier or purchaser and ask the question. If you use a freight forwarder, they should also be able to tell you.

Getting started 

When importing or exporting, the right paperwork is crucial. Missing or inaccurate documents can increase risks, lead to delays and extra costs, or even prevent a deal from being completed. Having a clear written contract to minimise the risk of misunderstandings is important. When it comes to delivery terms, Incoterms rules (International Commercial terms) are a series of 11 pre-defined commercial terms widely used to spell out exactly what delivery terms are being agreed, such as: 

– where the goods will be delivered

– who arranges the transport

– who is responsible for insuring the goods and who pays for insurance

– who handles customs procedures and who pays any duties and taxes

It is, therefore, important to fully understand each of the 11 Incoterms as some countries duties and import taxes are calculated against a specific Incoterm, however, disadvantages occur when they are applied incorrectly or misunderstood. Incoterms should therefore always be negotiated and used to provide a legally-enforceable part of the sales contact, to either avoid disputes when something goes wrong or help resolve disputes which go to litigation.

An Overview 

The infographic below from Ocean Air provides a very useful overview of each Incoterm clearly showing seller and buyer obligations and where the transfer of risk exists at each stage. Each of the 11 incoterms are presented as a three-letter acronym.

Incoterms Infographic

A Closer Look

Group 1: Terms which can be used regardless of the means of transport (multimodal).

EXW: Ex-Works or Ex-Warehouse

The seller makes the goods available at the seller’s location, so the buyer can take over all the transportation costs and also bears the risks of bringing the goods to their final destination.

FCA: Free Carrier

The seller is responsible for delivery of goods to a named carrier. Responsibility for cost and risk then passes to the buyer.

CPT: Carriage Paid To

The seller incurs the risks and costs associated with delivering goods to a carrier to an agreed-upon destination. With multiple carriers, the risks and costs transfer to the buyer upon delivery to the first carrier. CPT costs include export fees and taxes.

CIP: Carriage And Insurance Paid To

The seller pays for the carriage and insurance to the named overseas destination point, but risk passes when the goods are handed over to the first carrier.

DAP: Delivered At Place

A seller agrees to pay all costs and suffer any potential losses of moving goods sold to a specific location. Import custom clearance and all import duties must be made by the importer.

DPU: Delivered At Place Unloaded

Replaces Incoterm 2010 DAT: Delivery at Terminal. The exporter arranges carriage and delivery of the goods, ready for unloading at the named place. The seller is required to unload the goods at this destination. After the goods’ arrival, the customs clearance in the importing country needs to be completed by the buyer at his own cost and risk, including payment of all customs duties and taxes.

DDP: Delivered Duty Paid

The seller is responsible for delivering the goods to the named place in the country of the buyer, and pays all costs in bringing the goods to the destination. Import custom clearance and import duties must be made by the exporter.

Group 2: Terms which can be used for transport by sea and inland waterways.

CFR: Cost and Freight

The seller must pay the costs and freight to bring the goods to the overseas port of destination. The buyer pays costs and takes risk from then on.

FOB: Free On Board

The seller is responsible for all costs involved in the process up until the goods are loaded on to a vessel at the named UK port. Once goods have been loaded, the buyer is responsible for any costs and risks involved in the onward shipment.

FAS: Free Alongside Ship

The seller must place the goods alongside the ship at the named UK port. The risk of loss or damage to the goods passes when the goods are alongside the ship, and the buyer bears all the costs from that moment on.

CIF: Cost, Insurance and Freight

The 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 products are on the ship. 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.

How to Correctly use Incoterms in Paperwork

Incoterms need to be included in your paper work, for example, export declaration and in commercial/customs/freight documents. In the interest of clarity always cite the Incoterm and the version you are using, for example: ‘FCA <LIST THE FULL ADDRESS>, Incoterms 2020’.

Attention to Detail

Now you broadly know what Incoterms do, let’s now make it clear what they do not do:

  • Determine ownership or transfer title to the goods;
  • Evoke payment terms;
  • Apply to service contracts;
  • Define contractual rights or obligations (except for delivery) or breach of contract remedies;
  • Protect parties from their own risk or loss;
  • Cover the goods before or after delivery;
  • Specify details of the transfer, transport and delivery of the goods.

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