Incoterms

Today I will introduce a series of terms published by the International Chamber of Commerce called the Incoterms (International Commercial Terms) widely used in international transactions.

The incoterms are a series of three-letter trade terms related to common sales practices, they were created to avoid the gap between different members of the industry by acting as a uniform language they can use. The Incoterms are intended to communicate the costs and risks associated with the transaction of goods.

The Incoterms where first published in 1936 due to the necessity to address a recurrent problem; the differences existing between industries, countries etc, and the resulting misunderstanding when it came to delivering the goods.

Since its creation, the Incoterms rules have been periodically updated, with the eighth version (Incoterms 2010) having been published on January 2011.

There are 11 different term, 7 of them are defined for any modes of transportation and the other 4 are specific to sea transportation.

EXW (Ex-works)

This term places the maximum obligation on the buyer and minimum on the seller. The only obligation for the seller is making the good available at its premises on the date agreed. In the other hand, the buyer is the one who has to upload the goods and take care of the expenses plus has to bear the risks associated to the movement of the merchandise.

FCA (Free Carrier)

The seller is responsible for delivering the goods to an specific point designed by the buyer, the seller has also the obligation of loading the goods into the buyer´s carrier.

CPT (Carriage Paid To)

The seller pays for carriage. Responsibility for the goods transfers to the buyer when the seller passes them to the first carrier.

CIP (Carriage and Insurance Paid)

This term is very similar to CPT, the seller pays for carriage plus the insurance, but risks passes to the buyer when the goods are handed to the buyers hauler.

DAT (Delivered at Terminal)

In this case, the seller pays for carriage to the terminal and assumes all risks up to the point that the goods are loaded at the terminal; the buyer however is responsible for the costs related to importing the goods.

DAP (Delivered at Place)

The seller covers the cost for carriage to the named place and assumes all risks up to the point that the merchandise is ready to be unloaded by the buyer. Nonetheless, the seller hasn´t have to cover the cost related to import clearance.

DDP (Delivered Duty Paid)

This term, as opposed to EXW, DDP places the maximum obligations on the seller and little to no obligations on the buyer. The seller is responsible for dealing with all the tasks involved in moving the goods from the manufacturing plant to the buyer´s door. This include uploading the merchandise, covering all the transportation costs to the named place including the import clearance costs and taxes and also assuming all the risks. The buyer is only responsible for unloading the goods.

The following Incoterms only applies to sea and inland waterway transportation.

FAS (Free Alongside Ship)

The seller has the obligation to place the goods at the named port. The seller must get the goods ready for export, but the buyer is responsible for the cost and risk involved in loading them.

FOB (Free on Board)

The seller´s obligation includes loading the goods on board the buyer´s vessel. The buyer and seller share the costs and risks when the goods are on board.

CFR (Cost and freight)

The seller must bring the goods to the port of destination; however the buyer will have to deal with the risks once the goods are loaded on board of the vessel.

CIF (Cost, Insurance and Freight)

This term is exactly the same as the CFR except that the seller will also be responsible for paying for the insurance.

Summarizing; terms beginning with F refer to shipments where the primary cost of shipping is not paid by the seller. Terms beginning with C deal with shipments where the seller pays for shipping. E terms occur when seller's responsibilities are fulfilled when goods are ready to depart from their facilities. D terms cover shipments where the shipper's responsibility ends when the goods arrive at some specific point.

The Incoterms also deal with the documentation required for global trade specifying which part is responsible for which documents. It is essential for shippers to know the exact status of their shipments in terms of ownership and responsibility.