What are Incoterms?

 

 

What are the different types of Incoterms?

 

There are 11 Incoterms in total, which can be divided into four main groups:

Group	Incoterms	Details
C	CIF CFR CIP CPT	The seller/exporter/manufacturer is responsible for contracting and paying for carriage of the goods. The seller/exporter/manufacturer is not responsible for additional costs or risk of loss or damage to the goods once they have been shipped.
D	DAP DPU DDP	The seller/exporter/manufacturer is responsible for all costs and risks associated with bringing the goods to the named place of destination.
E	EXW	The only term where the seller/exporter makes the goods available at his own premises to the buyer/importer.
F	FCA FAS FOB	The seller/exporter is responsible for delivering the goods to a carrier named by the buyer.

 

Now let’s look at each of the 11 individual Incoterms in more detail:

Incoterm	Full meaning	Applied to	Seller responsibilities	Buyers responsibilities
EXW	Ex works <insert loading place>	All types of transport	Packaging the goods. Making the goods available to the buyer. Insurance is not mandatory (can be negotiated with the buyer).	Full responsibility from the moment the cargo leaves the warehouse of origin. Collecting the goods. Covering the cost of shipping, exporting, and importing. Paying import duties, taxes, and customs clearance fees.
FCA	Free carrier <insert named place of delivery>	All types of transport	Delivering the goods to a specified carrier/location as stated by the buyer. Clearing the goods for export. Paying any charges to ensure the goods are cleared for export. Insurance is not mandatory (can be negotiated with the buyer).	Full responsibility for the goods once they have been delivered to carrier. Paying import duties, taxes, and customs clearance fees.
CPT	Carriage paid to <insert place of destination>	All types of transport	Transporting the goods to a named destination. Paying customs, export, and shipping costs. Insurance is not mandatory (can be negotiated with the buyer).	Full responsibility after the products have been passed to the carrier. Insuring the goods. Delivery and unloading at final destination. Paying import duties, taxes, and customs clearance fees.
CIP	Carriage and insurance paid to <insert place of destination>	All types of transport	Transporting the goods to a named destination. Paying customs, export, and shipping costs. Insuring the goods.	Delivery and unloading at final destination. Paying import duties, taxes, and customs clearance fees.
DAP	Delivered at place <insert named place of destination>	All types of transport	Delivering the goods to the destination. Insurance is not mandatory (can be negotiated with the buyer).	Unloading the goods once they arrive at the agreed location. Paying import duties, taxes, and customs clearance fees.
DPU*	Delivered at place unloaded <insert place of destination>	All types of transport	Unloading the goods at the destination. Insurance is not mandatory (can be negotiated with the buyer).	Paying import duties, taxes, and customs clearance fees.
DDP	Delivery duty paid <insert place of destination>	All types of transport	The cost and risk of delivering the goods to the buyer’s destination. Paying import duty, taxes and customs clearance. Insurance is not mandatory (can be negotiated with the buyer).	Overseeing unloading.
FAS	Free alongside ship <insert name of port of loading>	Sea & inland waterway transport only	Clearing the goods for export. Full responsibility from when the goods leave the port of shipment to when they are placed alongside the vessel (e.g. quay/barge) nominated by the buyer at the named port of shipment. Insurance is not mandatory (can be negotiated with the buyer).	Paying import duties, taxes, and customs clearance fees. Full responsibility for all costs and the risk of loss/damage from the moment the goods are alongside the vessel (e.g. quay/barge) at the named port of shipment.
FOB	Free on board <insert named port of loading>	Sea & inland waterway transport only	Full responsibility until the goods reach the buyer’s vessel. Insurance is not mandatory (can be negotiated with the buyer).	Full responsibility after the goods are loaded onto the buyer’s vessel. Paying import duties, taxes, and customs clearance fees.
CFR	Cost and freight <insert named port of destination>	Sea & inland waterway transport only	Full responsibility until the goods are delivered on board the vessel (or until they procure goods which have already been delivered on board). Responsible for contracting for and paying the costs and freight necessary to bring the goods to the named port of destination. Insurance is not mandatory (can be negotiated with the buyer).	Arranging insurance before shipping (agreed together with the seller). Paying import duties, taxes, and customs clearance fees. The risk of loss of or damage to the goods from when the products are on board the vessel.
CIF	Cost insurance and freight <insert named port of destination>	Sea & inland waterway transport only	Full responsibility until the goods are delivered on board the vessel (or until they procure goods which have already been delivered on board). Responsible for contracting for and paying the costs and freight necessary to bring the goods to the named port of destination. Insuring the goods.	Arranging insurance before shipping (agreed together with the seller). Paying import duties, taxes, and customs clearance fees. The risk of loss of or damage to the goods from when the products are on board the vessel.

 *Introduced in 2020 to replace the previous DAT Incoterm.

 

Can Incoterms be customised?

 

Yes, Incoterms can be customised to reflect the specific agreement between the buyer/seller. However, doing so should be done with caution. If you decide to tailor Incoterms, it is important to be aware that:

• You should take legal advice before signing to check any customised Incoterms do not impact other terms in the contract or cause uncertainty.
• If you have used Incoterms which are significantly different from the standard ones, it may be harder to refer to case law or precedents in the event that you need to make a claim.

 

 

Are Incoterms legally binding?

 

Incoterms are not compulsory. That means buyers and sellers do not have to use them in their agreements. However, if a buyer and seller do decide to use Incoterms in their sales contract, they then become legally binding. Which means, Incoterms are only legally binding when they are included as part of a signed commercial contract, which itself is a legally binding document. It is also important to note that Incoterms do not override a country’s local laws.

 

 

When do Incoterms not apply?

 

Incoterms are used in international trade between buyers and sellers – they are not required between freight forwarders or carriers and their customers. Furthermore, Incoterms are only one part of a shipping contract, meaning they don’t:

• Address all conditions of sale
• Specify the goods being sold
• List the contract price
• Set out how or when payment should be made 
• Identify when ownership of the goods passes from the seller to the buyer
• List the documents the seller must give the buyer to aid with customs clearance 
• Address liability if the goods are not delivered according to the contract of sale

 

As a result, Incoterms have some limitations when applying them in real-world scenarios, most notably

• Domestic trade
• Multimodal contracts without proper documentation
• When additional legal frameworks override them

 

Do Incoterms cover insurance and customs duties?

 

While Incoterms set out who is responsible for arranging and paying for insurance and customs duties, not all Incoterms make it a requirement for the parties to have insurance (see table below). Therefore, buyers and sellers need to make their own decision as to what type of freight insurance they take out when completing a transaction.

Incoterms	Insurance requirements
EXW FCA FAS FOB CPT CFR	Insurance is not mandatory for either party.
CIP CIF	Seller/exporter/consignor is responsible for insurance up to the port of arrival.
DAP DDP DPU	Insurance is not mandatory, but the seller/exporter/consignor is likely to purchase it to cover their responsibilities.

 

How to select the most appropriate Incoterm

 

If you decide to include Incoterms in a sales contract, it is important you select the most appropriate terms. If you are wondering how to choose the best Incoterm, you may want to ask yourself the following questions:

• Is the Incoterm best suited to import or export?
  The term EXW is well-suited to exporters as the seller’s responsibilities end when the goods are ready to be collected from their facility. Conversely, DAP, DUP, and DDP are good options for importers as they give them control of moving the goods through customs after arrival.
  
  
• What mode of transport is the Incoterm best suited to?
  Certain Incoterms are more suited to certain types of transport. For example, the FAS, FOB, CFR, and CIF Incoterms are appropriate for sea and inland water transport, whereas FCA, EXW, CIP, CPT, DDP, and DAP can be used for all modes of transport.
  
  
• What type of goods are being traded?
  The nature of the goods themselves will determine the best type of Incoterm to use. For example, if the goods need immediate delivery, only certain Incoterms will be appropriate. Similarly, for cargoes which are unable to fit into a container – known as out-of-gauge cargoes (OOG) – the FAS Incoterm is likely the best to use.
  
  
• What level of experience do the parties have?
  DAP, DDP, and DPU are well-suited to importers with little previous experience. On the other hand, EXW is better for buyers who already have experience importing goods.
  
  
• Who do you want to have control over the goods, operations, and costs?
  If the importer wants more control over the goods, EXW might be most appropriate. On the other hand, the Incoterms CPT and CIP do not give the importer control over the cost and other operational aspects.
  
  
• What kind of relationship do the buyer and seller have?
  How well the parties know one another will influence the best type of Incoterm to choose. If the importer does not know the seller well, a FAS, FOB, or FCA are probably most appropriate as these ensure the importer controls the cost and logistics of the goods from when they are loaded, until they reach their destination.
  
  
• Who will be responsible for insuring the goods?
  If the seller is taking responsibility for insuring the goods, using CIF or CIP may be most appropriate. On the other hand, a CPT Incoterm means the buyer has no responsibility for insuring the goods.

 

Let’s put this into context with some real-world examples to show how a business might choose a specific Incoterm in order to make their operations more effective:

• Reducing costs
  A European electronics distributor switches from EXW to FCA. This allows them to optimise shipping costs because they no longer have to pay the transport costs from the supplier’s factory, nor for the export costs.
  
  
• Managing risk
  A household appliance manufacturer chooses Incoterms that mean they are liable for, and in control of, critical transport stages. This helps them manage the risk of damages and/or delays and ensure more effective international deliveries.
  
  
• Improving delivery speeds
  A global fashion retailer uses the DDP Incoterm with their suppliers in Asia. By making the suppliers responsible for paying customs duties and overseeing import clearance, it takes less time for the retailer to receive goods in their European distribution centres.

 

 

Which Incoterm is best for the buyer/seller?

 

There’s no definitive answer to which is the best Incoterm as this will depend on the specific circumstances of the trade. When choosing the best Incoterm, you need to consider a variety of factors, such as what resources are available, how much risk you are willing to take, and how much control you want. In general, there are:

	Best Incoterm(s)	Reasoning
Sellers	EXW	The buyer takes the majority of the responsibility.
Buyers	DAP DDP DPU	The seller is responsible for everything until the goods arrive at the destination in the buyer’s country.