What are Incoterms?
Incoterms (International Commercial Terms) are a set of globally recognized trade rules, guidelines and shipping terms published by the International Chamber of Commerce (ICC). Originally issued in 1936, Incoterms have been regularly updated to address changes in the international trade industry. The latest revision went into effect January 1, 2020. While not mandatory, Incoterms offer a common language for buyers and sellers to agree upon contract transactions. Incoterms rules help clarify:
- The interpretation of contract clauses common to import/export transactions
- How costs and risks are assigned to parties as well as an outline of timing
- Specific instructions to other parties involved in throughout the course of the agreement (financial institutions, carriers, forwarders, customs brokers, and others)
In short, Incoterms are a useful set of guidelines to help buyers and sellers reach an understanding of each party’s responsibilities and liabilities well before a shipment takes place.
What do Incoterms define?
Recognized and accepted by governments around the world, Incoterms help define primary obligations and responsibilities among trading partners:
- Transport costs: Defines who pays for what transportation cost at every step of the shipment.
- Point of delivery: Establishes the location for the exchange of goods from seller to buyer.
- Import/export formalities: Onetime licensing procedure to designate legally responsible parties for importing/exporting goods.
- Insurance expenses: Identifies who is responsible for insurance costs.
Incoterms help better communicate specific provisions of the contract. Clearer communication reduces the risk of misinterpretation between parties.
How are Incoterms categorized?
There are four main shipping terms abbreviation groups with seven applicable to any mode of transportation (FAS, FOB, CFR and CIF apply only to ocean or inland waterway transport):
E terms – Departure
EXW – Ex Works (place of delivery)
F terms – Main Carriage Unpaid
(The seller hands off cleared-for-export goods to the first carrier, named by the buyer, at a specified location.)
FCA – Free Carrier (Place of Delivery): Risk passes to the buyer at this point.
FAS – Free Alongside Ship (Port of Shipment): Risk of loss or damage to goods passes to the buyer once the products are alongside the ship.
FOB – Free On Board (Port of Shipment): Risk of loss or damage to goods passes to buyer once products are on board the ship.
C terms – Main Carriage Paid
CFR – Cost and Freight (Port of Destination): Seller must contract for and pay costs involved with transporting goods to named port of destination. Risk of loss or damage passes to buyer once goods are on board the vessel.
CIF – Cost, Insurance and Freight (Port of Destination): Seller assumes costs of insurance to cover risk of loss or damage to goods while in transit to named destination port. Under CIF, seller is only responsible for obtaining a minimum amount of insurance coverage. Additional protection can be negotiated or otherwise procured by the buyer.
CPT – Carriage Paid To (Place of Destination): Seller must contract for or pay the cost of carriage needed to transport the products to the name place of destination.
CIP – Carriage and Insurance Paid To (Place of Destination): Seller assumes the same obligations as CPT, but they are also responsible for insurance to cover the buyer’s risk of loss or damage during the carriage.
D terms – Arrival
DAP – Delivered at Place (Place of Destination): The seller delivers when shipment is available to the buyer on the vehicle used for transport ready for unloading at the named destination. The seller assumes all risks for bringing and unloading goods at the named place of destination.
DPU – Delivered at Place Unloaded (Place of Destination): Formerly DAT – Delivered At Terminal. The seller assumes the risk involved with delivering and unloading goods at the specified place of destination.
DDP – Delivered Duty Paid (Place of Destination): Seller must clear products for both import and export and pay any duty for each while carrying out all customs formalities.
What change were made to the most recent revision of Incoterms?
Incoterms 2020 took effect on January 1, 2020. With this ninth revision, the ICC looks to improve a number of aspects of Incoterms 2010 while also addressing new issues.
CIP vs. CIF
Businesses contracting for the delivery of goods should be aware that default insurance coverage for CIP (Carriage and Insurance Paid) has changed from a minimum to a maximum level (i.e.—insurance coverage under CIP is “All Risk”). The change recognizes that many shipments under this omnimodal term are for relatively high value goods rather than lower priced commodities. Parties are not obligated to adopt the higher insurance, however, if they mistakenly use CIF (Cost Insurance and Freight) instead of CIP, they may find their shipments are underinsured as CIF only extends to “Free of Particular Average” coverage.
DAT changed to DPU
The new Incoterm DPU (Delivered at Place Unloaded) was added to the 2020 revision, replacing the previous term DAT (Delivered at Terminal). Obligations and functions of both terms remain exactly the same, however, the name clarification is substantial. Under the new term, goods can be unloaded at a transport terminal of infrastructure (port, dock, airport, etc.) as well as any other final destination with facilities for unloading the goods from the means of transport (e.g.—factory, warehouse, etc.).
A vast majority of buyers and sellers may be using the wrong Incoterms when writing shipping contracts. Most remain unconcerned—until a problem occurs. Finding the right logistics partner can help importers and exporters review their level of protection regarding insurance and compliance procedures. They can then educate how to best understand and protect business interests.