What are Incoterms?
Incoterms are international trade terms that define the responsibilities of buyer and seller in the transportation of goods. They determine who bears the costs and risks during transport, such as transportation costs, insurance and customs duties. Choosing an Incoterm correctly is important to avoid misunderstandings and additional costs. The latest version, Incoterms 2020, contains 11 rules divided into four categories: E-terms (departure), F-terms (main transport not paid), C-terms (main transport paid) and D-terms (arrival). Each Incoterm has specific obligations for both parties depending on the delivery point and mode of transport chosen.
What are Incoterms?
Incoterms are the international trade terms that determine who is responsible for costs and risks during the transportation of goods from the seller to the buyer.
It is critical to choose the correct Incoterm when importing or exporting goods because it determines responsibility and costs for transportation, insurance and customs duties. A wrong choice can lead to unforeseen costs and risks.
Did you know that "Incoterms" stands for International Commercial Terms? Translated into Dutch, it means "International Commercial Terms."
Below you will find all 11 Incoterms briefly explained:
- EXW (Ex Works, ex factory): The seller delivers the goods to the buyer at his own location. The buyer is responsible for all further costs and risks.
- FCA (Free Carrier, Free Carrier): The seller delivers the goods to the carrier designated by the buyer. The seller is responsible for clearing the goods for export.
- CPT (Carriage Paid To, freight paid to): The seller delivers the goods to the carrier or other person designated by the seller. The seller bears the cost up to the point of destination.
- CIP (Carriage and Insurance Paid To): The seller delivers the goods to the carrier or other person designated by the seller. The seller bears the cost and risk to the point of destination.
- THAT (Delivered at Terminal): The seller delivers the goods at the agreed terminal at the destination. The seller bears the costs and risks until arrival at the terminal. This has been replaced by the DPU.
- DAP (Delivered at Place): The seller delivers the goods at the agreed destination, ready for unloading. The seller bears all costs and risks up to this place.
- DDP (Delivered Duty Paid, delivered inclusive of duties paid): The seller delivers the goods to the agreed destination including all charges and customs duties. The seller is responsible for clearing the goods for import.
- FAS (Free Alongside Ship): The seller delivers the goods alongside the ship at the port of loading. The buyer bears all costs and risks from that point forward.
- FOB (Free On Board): The seller delivers the goods aboard the ship at the port of shipment. From that point, the buyer is responsible for transportation and costs.
- CFR (Cost and Freight): The seller is responsible for cost and freight up to the destination port of arrival. The risks and responsibilities pass to the buyer once the goods are loaded on board.
- CIF (Cost, Insurance and Freight): The seller is responsible for cost, insurance and freight up to the destination port of arrival. The risks and responsibilities pass to the buyer once the goods are loaded on board.
- DPU (Delivered at Place Unloaded): The seller takes responsibility for the transportation process and costs. The seller is also responsible for unloading the goods at the agreed destination. The transfer of risk occurs once the seller has unloaded the goods at the destination.
It is important to note that each Incoterm defines specific responsibilities and risks for both the buyer and seller. Therefore, it is essential to choose the right Incoterm to avoid potential disputes and ambiguities between both parties.
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The history of Incoterms
The International Commercial Terms (Incoterms) were first introduced in 1936 by the International Chamber of Commerce (ICC). The goal was to simplify international trade by creating one universal standard. Since then, Incoterms have been regularly updated to keep up with changes in international trade.
The latest version, Incoterms 2020, went into effect January 1, 2020. The main changes in this update were:
- DAT (Delivered at Terminal) was replaced by DPU (Delivered at Place Unloaded)
- Adjustments in insurance requirements at CIF and CIP
- New rules for transportation by own means of transport
- Tightened security requirements
Common mistakes with Incoterms
- Wrong term for transportation method: For example, using FOB for container transport by road
- Incomplete place designation: Only mention the city without a specific delivery address
- Insurance not properly arranged: This is especially common with CIF and CIP terms
- Customs fees forgotten: Especially with DDP, these costs can be significant
Categories Incoterms
Incoterms are divided into four categories:
E-terms (Departure)
- EXW: Minimum obligation for seller
- Suitable for domestic trade
F-terms (Main transport not paid)
- FCA, FAS, FOB
- Seller delivers goods to carrier
- Copper controls main transport
C-terms (Main transport paid)
- CFR, CIF, CPT, CIP
- Seller pays for transportation
- Risk passes rather than cost
D-terms (Arrival)
- DAP, DPU, DDP
- Seller shall bear all costs up to destination
- Maximum obligation for seller
Frequently asked questions about Incoterms
Why are Incoterms important?
Incoterms are important because they clarify the responsibilities of buyers and sellers in international trade. They help avoid misunderstandings and disputes by clearly defining the allocation of costs and risks. They enable both parties to understand their obligations and responsibilities and provide a common frame of reference for international trade agreements.
How many Incoterms are there?
There are a total of 11 Incoterms in the most recent edition (2020). These include EXW, FCA, CPT, CIP, DPU, DAP, DDP, FAS, FOB, CFR and CIF. Each of these Incoterms has specific applications and defines the responsibilities of buyers and sellers in different ways.
Should Incoterms be explicitly stated in a trade agreement?
Yes, it is important to clearly and explicitly state the specific Incoterm(s) in a trade agreement. This ensures that both parties are aware of their obligations and responsibilities. Failure to state an Incoterm can lead to confusion and disputes.
Are Incoterms legally binding?
Incoterms are not laws per se, but they are widely recognized and accepted in international trade practices. They can be contractually binding if they are clearly incorporated into a trade agreement between the buyer and seller. It is important to seek legal advice when drafting international trade agreements to ensure that Incoterms are properly applied.
Do Incoterms apply to all types of goods and transportation?
Yes, Incoterms apply to different types of goods and transportation methods, such as maritime, air, road and rail transportation. They can be adapted to the specific needs and requirements of the trade transaction.
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