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This guide provides clear and important information about Incoterms.
Before we get started have a look at our frequently asked questions.
Incoterms (which stand for International Commercial Terms) are 11 international rules created by the International Chamber of Commerce (ICC). They are accepted by governments, legal authorities and practitioners worldwide as the standard terms used in sales contracts when 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.
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
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.
Yes. Regardless of Brexit, Incoterms are revised in ten-year intervals to reflect international commercial practice. The last revision effected in Incoterms 2020.
Incoterms are a legally-enforceable part of a sales contract and can be used in the resolution of disputes that go to litigation.
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.
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.
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.
A Closer Look
Group 1: Terms which can be used regardless of the means of transport (multimodal).
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.
The seller is responsible for delivery of goods to a named carrier. Responsibility for cost and risk then passes to the buyer.
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.
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.
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.
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.
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.
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.
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.
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.
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: