International commercial terms were first introduced by the International Chamber of Commerce back in 1936, with the goal of promoting open markets to create economic prosperity in a world recovering from the first world war.
Incoterms, as they’re more commonly known, provide a globally recognised range of guidelines around the transportation of goods. These guidelines facilitate commerce around the world and enhance the efficiency of global trade, by standardising and simplifying international trade terms, and providing clarity on the obligations of buyers and sellers.
What are Incoterms Used For?
Organisations across the world engaged in both domestic and international trade, adhere to, and rely on Incoterms to establish the party responsible for paying for and managing the logistical components of their trade arrangement, such as:
- Transportation – Distribution of goods from seller to buyer, including the point of delivery where risk transfers from one party to the other.
- Insurance – Establishing when the responsibility for loss or damage moves from seller to buyer.
- Costs – Assigning the costs of transportation, customs clearance, duties, and any loading/unloading costs.
- Documentation – Identifying which party handles documentation such as transport and import/export documentation.
However, Incoterms play more than a crucial foundational role, and are required across a wide range of day-to-day activities such as filling out purchase orders, effectively labelling shipments, issuing certificates of origin, and completing free carrier agreements.
The Pros and Cons of Incoterms
Pros:
- Perhaps the biggest advantage of Incoterms is that they standardise the complexities of international trade.
- These standardised guidelines facilitate an agreement that ensures both buyer and seller are consenting to the same terms, provide clarity around their obligations to each other, and help to avoid confusion, misunderstandings, and disagreements that could lead to legal proceedings.
- Incoterms are official, updated, and defined guidelines from the largest business organisation in the world, the International Chamber of Commerce.
Cons:
- While there are no problems with the terms themselves, both parties can have different preferences because buyers and sellers tend to understand specific terms better than others.
- Some terms can lead to one party incurring higher costs.
- Some Incoterms aren’t accepted by local laws, and using the wrong one can make your business vulnerable to liability.
The Terms and the Transportation They Cover
There are 11 Incoterms in total. 7 apply to all/any mode of transport, while 4 apply only to sea and inland waterway transport.
Incoterms for Any Mode of Transport:
- CIP (Carriage and Insurance Paid): Seller is responsible for delivering goods to the agreed destination, paying for the transportation and insurance.
- CPT (Carriage Paid To): Under this Incoterm, the seller is responsible for delivering goods to the agreed destination and paying for transportation, but not insurance.
- DAP (Delivered at Place): Seller is responsible for delivering goods to the agreed location, while the buyer is responsible for customs clearance and import duties or taxes.
- DPU (Delivered at Place Unloaded): The seller is responsible for delivering and unloading goods at the agreed location, while the buyer is responsible for customs clearance and import duties.
- DDP (Delivered Duty Paid): Seller is responsible for delivering the goods to the agreed location, they assume all risk, and take on all transportation costs, including duties, taxes, customs clearance, and shipping costs.
- EXW (Ex Works): Under this Incoterm, the seller makes the goods available at their facility. The buyer is responsible for collecting, loading, and transporting the goods, as well as all costs and risks associated with getting the goods to their final destination, such as import duties and taxes, transportation costs etc.
- FCA (Free Carrier): The seller delivers goods to a carrier or location specified by the buyer, and is responsible for clearing the goods for export, and all risks until the goods are handed over to the carrier. From this point, the buyer assumes all risks and costs, including transportation, insurance, import customs clearance and duties.
Incoterms for Sea & Inland Waterway Transport:
- CFR (Cost and Freight): Seller is responsible for delivering the goods to a specified destination or port, loading them onto a designated vessel, and handling freight and the associated costs to bring the goods to their final destination. Under this Incoterm, the seller is required to provide the buyer with transport documents like proof of delivery and bill of lading.
- CIF (Cost, Insurance & Freight): The seller is responsible for delivering the goods to a specific port, loading them onto a designated vessel, and handling costs and freight to bring the goods to their destination. They’re also responsible for insurance to cover loss or damage to the goods during carriage, but risk passes to the buyer when the goods are loaded onto the vessel.
- FAS (Free Alongside Ship): The seller must deliver the goods alongside the vessel – but not load them on. When the goods are alongside the vessel, the risk of loss and damage passes to the buyer who nominates the goods, and assumes the expenses. This Incoterm is more suitable for non-containerised cargo that can be more easily delivered alongside the vessel.
- FOB (Free on Board): Seller must deliver the goods onboard the vessel, where the goods are nominated by the buyer. The risk of loss or damage is passed to the buyer when the products are aboard, from which point the buyer assumes all expenses.
Incoterms Do Not Cover:
- Methodology and timing or payment.
- Transfer of ownership/title.
- Details of goods sold.
- The conditions of a sale.
- Specify which documentation must be provided by the seller to facilitate customs clearance in the buyer’s country.
- Address liability for failure to provide goods as outlined in contract.
2020 Updates Vs 2010 Incoterms
Incoterms were updated by the ICC in 2020, for the first time since 2010. But how are 2020’s updated terms different to 2010’s?
- 2020’s Incoterms were written to be clearer and more plain speaking.
- The structure and layout of the ICC’s 2020 book has changed, making it easier to cross-reference text and identify relevant terms.
- DPU (Delivered at Place Unloaded) was a new term for 2020, replacing 2010’s DTA (Delivered at Terminal). The term was updated so the destination can be any agreed upon location, not just a terminal.
- Insurance requirements for the CIP Incoterm (Carriage and Insurance Paid), have been updated so the seller is required to place Institute Cargo Clause A coverage on the goods.
- 2020 updates address security liability when it comes to transportation from the seller to the destination country, and customs clearance.
- The FCA Incoterm has been updated to enable buyers to instruct sellers to issue transport documentation with an on-board notation for FCA shipments.
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