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Incoterms
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The Incoterms or International Commercial Terms are a series of pre-defined commercial terms published by the International Chamber of Commerce (ICC) relating to international commercial law.[1] Incoterms define the responsibilities of exporters and importers in the arrangement of shipments and the transfer of liability involved at various stages of the transaction. They are widely used in international commercial transactions or procurement processes and their use is encouraged by trade councils, courts and international lawyers.[2] A series of three-letter trade terms related to common contractual sales practices, the Incoterms rules are intended primarily to clearly communicate the tasks, costs, and risks associated with the global or international transportation and delivery of goods. Incoterms inform sales contracts defining respective obligations, costs, and risks involved in the delivery of goods from the seller to the buyer, but they do not themselves conclude a contract, determine the price payable, currency or credit terms, govern contract law or define where title to goods transfers.
The Incoterms rules are accepted by governments, legal authorities, and practitioners worldwide for the interpretation of most commonly used terms in international trade. They are intended to reduce or remove altogether uncertainties arising from the differing interpretations of the rules in different countries. As such they are regularly incorporated into sales contracts worldwide.[3]
"Incoterms" is a registered trademark of the ICC.
CISG art. 66 is a supplement to an inadequate Incoterms rule.[4]
The first work published by the ICC on international trade terms was issued in 1923, with the first edition known as Incoterms published in 1936. The Incoterms rules were amended in 1953,[5] 1967, 1976, 1980, 1990, 2000, and 2010, with the ninth version — Incoterms 2020 [6] — having been published on September 10, 2019.
Incoterms 2020
[edit]
Incoterms 2020 is the ninth set of international contract terms published by the International Chamber of Commerce, with the first set having been published in 1936. Incoterms 2020 defines 11 rules, the same number as defined by Incoterms 2010.[7] One rule of the 2010 version ("Delivered at Terminal"; DAT)[8] was removed, and is replaced by a new rule ("Delivered at Place Unloaded"; DPU) in the 2020 rules.
The insurance to be provided under terms CIF and CIP has also changed, increasing from Institute Cargo Clauses(C) to Institute Cargo Clauses(A). Under the CIF Incoterms rule, which is reserved for use in maritime trade and is often used in commodity trading, the Institute Cargo Clauses (C) remains the default level of coverage, giving parties the option to agree to a higher level of insurance cover. Taking into account feedback from global users, the CIP Incoterms rule now requires a higher level of cover, compliant with the Institute Cargo Clauses (A) or similar clauses.[9]
In prior versions, the rules were divided into four categories, but the 11 pre-defined terms of Incoterms 2020 are subdivided into two categories based only on method of delivery. The larger group of seven rules may be used regardless of the method of transport, with the smaller group of four being applicable only to sales that solely involve transportation by water where the condition of the goods can be verified at the point of loading on board ship. They are therefore not to be used for containerized freight, other combined transport methods, or for transport by road, air or rail.
Incoterms 2020 also formally defines delivery. Previously, the term had been defined informally but it is now defined as the point in the transaction where "the risk of loss or damage [to the goods] passes from the seller to the buyer".[10]
Incoterms in government regulations
[edit]In some jurisdictions, the duty costs of the goods may be calculated against a specific Incoterm: for example in India, duty is calculated against the CIF value of the goods,[11] and in South Africa the duty is calculated against the FOB value of the goods.[12] Because of this it is common for contracts for exports to these countries to use these Incoterms, even when they are not suitable for the chosen mode of transport. If this is the case then great care must be exercised to ensure that the points at which costs and risks pass are clarified with the customer.
Defined terms in Incoterms
[edit]There are certain terms that have special meaning within Incoterms, and some of the more important ones are defined below:[13]
- Delivery: The point in the transaction where the risk of loss or damage to the goods is transferred from the seller to the buyer
- Arrival: The point named in the Incoterm to which carriage has been paid
- Free: Seller has an obligation to deliver the goods to a named place for transfer to a carrier
- Carrier: Any person who, in a contract of carriage, undertakes to perform or to procure the performance of transport by rail, road, air, sea, inland waterway or by a combination of such modes
- Freight forwarder: A firm that makes or assists in the making of shipping arrangements;
- Terminal: Any place, whether covered or not, such as a dock, warehouse, container yard or road, rail or air cargo terminal
- To clear for export: To file Shipper’s Export Declaration and get export permit
Variation of Incoterms
[edit]Parties adopting Incoterms should be wary about their intention and variations. The desire of the parties should be expressed clearly and casual adoption should be refrained. Also, making additions or variations to the meaning of a certain term should be carefully done as parties' failure to use any trade term at all can produce unexpected results.[2]
Rules for any mode of transport
[edit]EXW – Ex Works (named place of delivery)
[edit]The seller makes the goods available at their premises, or at another named place. This term places the maximum obligation on the buyer and minimum obligations on the seller. The Ex Works term is often used while making an initial quotation for the sale of goods without any costs included.
EXW means that a buyer incurs the risks of bringing the goods to their final destination. Either the seller does not load the goods on collecting vehicles and does not clear them for export, or if the seller does load the goods, they do so at buyer's risk and cost. If the parties agree that the seller should be responsible for the loading of the goods on departure and to bear the risk and all costs of such loading, this must be made clear by adding explicit wording to this effect in the contract of sale.
There is no obligation for the seller to make a contract of carriage, but there is also no obligation for the buyer to arrange one either - the buyer may sell the goods on to their own customer for collection from the original seller's warehouse. However, in common practice the buyer arranges the collection of the freight from the designated location, and is responsible for clearing the goods through Customs. The buyer is also responsible for completing all the export documentation, although the seller does have an obligation to obtain information and documents at the buyer's request and cost.
These documentary requirements may result in two principal issues. Firstly, the stipulation for the buyer to complete the export declaration can be an issue in certain jurisdictions (not least the European Union) where the customs regulations require the declarant to be either an individual or corporation resident within the jurisdiction. If the buyer is based outside of the customs jurisdiction, they will be unable to clear the goods for export, meaning that the goods may be declared in the name of the seller by the buyer, even though the export formalities are the buyer's responsibility under the EXW term.[14]
Secondly, most jurisdictions require companies to provide proof of export for tax purposes. In an EXW shipment, the buyer is under no obligation to provide such proof to the seller, or indeed to even export the goods. In a customs jurisdiction such as the European Union, this would leave the seller liable to a sales tax bill as if the goods were sold to a domestic customer. It is therefore of utmost importance that these matters are discussed with the buyer before the contract is agreed. It may well be that another Incoterm, such as FCA seller's premises, may be more suitable, since this puts the onus for declaring the goods for export onto the seller, which provides for more control over the export process.[15]
FCA – Free Carrier (named place of delivery)
[edit]The seller delivers the goods, cleared for export, at a named place (possibly including the seller's own premises). The goods can be delivered to a carrier nominated by the buyer, or to another party nominated by the buyer.
In many respects this Incoterm has replaced FOB in modern usage, although the critical point at which the risk passes moves from loading aboard the vessel to the named place. The chosen place of delivery affects the obligations of loading and unloading the goods at that place.
If delivery occurs at the seller's premises, or at any other location that is under the seller's control, the seller is responsible for loading the goods on to the buyer's carrier. However, if delivery occurs at any other place, the seller is deemed to have delivered the goods once their transport has arrived at the named place; the buyer is responsible for both unloading the goods and loading them onto self own carrier.
CPT – Carriage Paid To (named place of destination)
[edit]CPT replaces the C&F (cost and freight) and CFR terms for all shipping modes outside of non-containerized sea freight.
The seller pays for the carriage of the goods up to the named place of destination. However, the goods are considered to be delivered when the goods have been handed over to the first or main carrier, so that the risk transfers to buyer upon handing goods over to that carrier at the place of shipment in the country of Export.
The seller is responsible for origin costs including export clearance and freight costs for carriage to the named place of destination (either the final destination such as the buyer's facilities or a port of destination. This has to be agreed to by seller and buyer, however).
If the buyer requires the seller to obtain insurance, the Incoterm CIP should be considered instead.
CIP – Carriage and Insurance Paid to (named place of destination)
[edit]This term is broadly similar to the above CPT term, with the exception that the seller is required to obtain insurance for the goods while in transit. CIP requires the seller to insure the goods for 110% of the contract value under Institute Cargo Clauses (A) of the Institute of London Underwriters (which is a change from Incoterms 2010 where the minimum was Institute Cargo Clauses (C)), or any similar set of clauses, unless specifically agreed by both parties. The policy should be in the same currency as the contract, and should allow the buyer, the seller, and anyone else with an insurable interest in the goods to be able to make a claim.
CIP can be used for all modes of transport, whereas the Incoterm CIF should only be used for non-containerized sea-freight.
DPU – Delivered At Place Unloaded (named place of destination)
[edit]This Incoterm requires that the seller delivers the goods, unloaded, at the named place of destination. The seller covers all the costs of transport (export fees, carriage, unloading from main carrier at destination port and destination port charges) and assumes all risk until arrival at the destination port or terminal.
The terminal can be a port, airport, or inland freight interchange, but must be a facility with the capability to receive the shipment. If the seller is not able to organize unloading, they should consider shipping under DAP terms instead. All charges after unloading (for example, import duty, taxes, customs and on-carriage) are to be borne by buyer. However, any delay or demurrage charges at the terminal will generally be for the seller's account.
Some uncertainty has emerged since Incoterms 2020 were adopted as to the meaning of "unloaded" when goods are delivered in a container, usually by sea, as the removal of the container from the incoming vessel may suggest that it has been "unloaded", but the goods themselves are not yet "unloaded" while they remain in the container.[16]
DAP – Delivered At Place (named place of destination)
[edit]Incoterms 2010 defines DAP as 'Delivered at Place' – the seller delivers when the goods are placed at the disposal of the buyer on the arriving means of transport ready for unloading at the named place of destination. Under DAP terms, the risk passes from seller to buyer from the point of destination mentioned in the contract of delivery.
Once goods are ready for shipment, the necessary packing is carried out by the seller at their own cost, so that the goods reach their final destination safely. All necessary legal formalities in the exporting country are completed by the seller at their own cost and risk to clear the goods for export.
After arrival of the goods in the country of destination, the customs clearance in the importing country needs to be completed by the buyer, e.g. import permit, documents required by customs, etc., including all customs duties and taxes.
Under DAP terms, all carriage expenses with any terminal expenses are paid by seller up to the agreed destination point. The necessary unloading cost at final destination has to be borne by buyer under DAP terms.[17][18]
DDP – Delivered Duty Paid (named place of destination)
[edit]Seller is responsible for delivering the goods to the named place in the country of the buyer, and pays all costs in bringing the goods to the destination including import duties and taxes. The seller is not responsible for unloading. This term is often used in place of the non-Incoterm "Free In Store (FIS)". This term places the maximum obligations on the seller and minimum obligations on the buyer. No risk or responsibility is transferred to the buyer until delivery of the goods at the named place of destination.[19]
The most important consideration for DDP terms is that the seller is responsible for clearing the goods through customs in the buyer's country, including both paying the duties and taxes, and obtaining the necessary authorizations and registrations from the authorities in that country. Unless the rules and regulations in the buyer's country are very well understood, DDP terms can be a very big risk both in terms of delays and in unforeseen extra costs, and should be used with caution.
Rules for sea and inland waterway transport
[edit]To determine if a location qualifies for these four rules, please refer to 'United Nations Code for Trade and Transport Locations (UN/LOCODE)'.[20]
The four rules defined by Incoterms 2020 for international trade where transportation is entirely conducted by water are as per the below. It is important to note that these terms are generally not suitable for shipments in shipping containers; the point at which risk and responsibility for the goods passes is when the goods are loaded on board the ship, and if the goods are sealed into a shipping container it is impossible to verify the condition of the goods at this point.
Also of note is that the point at which risk passes under these terms has shifted from previous editions of Incoterms, where the risk passed at the ship's rail.
FAS – Free Alongside Ship (named port of shipment)
[edit]The seller delivers when the goods are placed alongside the buyer's vessel at the named port of shipment. This means that the buyer has to bear all costs and risks of loss of or damage to the goods from that moment. The FAS term requires the seller to clear the goods for export, which is a reversal from previous Incoterms versions that required the buyer to arrange for export clearance. However, if the parties wish the buyer to clear the goods for export, this should be made clear by adding explicit wording to this effect in the contract of sale. This term should be used only for non-containerized sea freight and inland waterway transport.
FOB – Free on Board (named port of shipment)
[edit]Under FOB terms the seller bears all costs and risks up to the point the goods are loaded on board the vessel. The seller's responsibility does not end at that point unless the goods are "appropriated to the contract" that is, they are "clearly set aside or otherwise identified as the contract goods".[21] Therefore, FOB contract requires a seller to deliver goods on board a vessel that is to be designated by the buyer in a manner customary at the particular port. In this case, the seller must also arrange for export clearance. On the other hand, the buyer pays cost of marine freight transportation, bill of lading fees, insurance, unloading and transportation cost from the arrival port to destination. Since Incoterms 1980 introduced the Incoterm FCA, FOB should only be used for non-containerized seafreight and inland waterway transport. However, FOB is commonly used incorrectly for all modes of transport despite the contractual risks that this can introduce. In some common law countries such as the United States of America, FOB is not only connected with the carriage of goods by sea but also used for inland carriage aboard any "vessel, car or other vehicle."[22]
CFR – Cost and Freight (named port of destination)
[edit]The seller pays for the carriage of the goods up to the named port of destination. Risk transfers to buyer when the goods have been loaded on board the ship in the country of Export. The seller is responsible for origin costs including export clearance and freight costs for carriage to the named port. The shipper is not responsible for delivery to the final destination from the port (generally the buyer's facilities), or for buying insurance. If the buyer requires the seller to obtain insurance, the Incoterm CIF should be considered. CFR should only be used for non-containerized seafreight and inland waterway transport; for all other modes of transport it should be replaced with CPT.
CIF – Cost, Insurance & Freight (named port of destination)
[edit]Use preceding Incoterms
[edit]The term "cost, insurance, freight" or "c.i.f." predates the introduction of Incoterms. Craighall noted in a 1919 article that in "earlier times" the initials were usually written "C. F. & I.": he quotes the phrase "C. F. & I. by steamer to N.Y." used in a shipping contract addressed in the New York State case of Mee v. McNider (1886).[23][24]
The first English court case which referred to c.i.f. was Tregelles v. Sewell (1862),[25] where the court established that under c.i.f. terms, risk passes to the buyer on shipment.[26] In the case of E. Clemens Horst Co. v. Biddell Brothers, the UK House of Lords ruled in 1911 that "the sellers in a c.i.f. contract were entitled to payment of the price upon tender of the bill of lading and insurance policy. The purchasers' intent to wait for satisfactory delivery and inspection was overruled.[27] Shortly afterwards in 1915-16, the case of Arnhold Karberg & Co. v. Blythe, Green, Jourdain & Co. in the High Court and Court of Appeal showcased judicial debate about whether a c.i.f. bill of lading could evidence a sale of goods, Scrutton J ruling in the High Court that it did not, because a c.i.f. sale is "not a sale of goods, but a sale of documents relating to goods".[28] The Court of Appeal upheld his decision, although Bankes LJ and Warrington LJ argued that "a c.i.f. contract is a contract for the sale of goods to be performed by the delivery of the documents".[29] In a Ninth Circuit Court of Appeals case referencing the Arnhold Karberg case and also Manbre Saccharine v Corn Products (1919), it was explained that "under a c. i. f. contract the obligation of the seller is to deliver documents rather than goods, to transfer symbols rather than physical property".[30] In the Manbre Saccharine case the seller was unable to enforce the c.i.f. contract where the goods had been lost at sea, but McCardie J emphasised that this was because no insurance policy was tendered, only a letter confirming insurance, and also because the goods did not match the contracted description: had these matters been otherwise, the contract would have been enforced.[31]
Incoterms usage
[edit]As an Incoterm, CIF is broadly similar to the term CFR, with the exception that the seller is required to obtain insurance for the goods while in transit. CIF requires the seller to insure the goods for 110% of the contract value under Institute Cargo Clauses (A) of the Institute of London Underwriters (which is a change from Incoterms 2010 where the minimum was Institute Cargo Clauses (C)), or any similar set of clauses, unless specifically agreed by both parties. The policy should be in the same currency as the contract. The seller must also turn over documents necessary, to obtain the goods from the carrier or to assert claim against an insurer to the buyer. The documents include (as a minimum) the invoice, the insurance policy, and the bill of lading. These three documents represent the cost, insurance, and freight of CIF. The seller's obligation ends when the documents are handed over to the buyer. Then, the buyer has to pay at the agreed price. Another point to consider is that CIF should only be used for non-containerized sea freight; for all other modes of transport it should be replaced with CIP.
Allocations of costs to buyer/seller according to Incoterms 2020
[edit]| Incoterm | Loading at origin | Export customs declaration | Carriage to port of export | Unloading of truck in port of export | Loading on vessel/airplane in port of export | Carriage (sea/air) to port of import | Insurance | Unloading in port of import | Loading on truck in port of import | Carriage to place of destination | Import customs clearance | Import duties and taxes | Unloading at destination |
| EXW | Buyer | Buyer | Buyer | Buyer | Buyer | Buyer | Buyer | Buyer | Buyer | Buyer | Buyer | Buyer | Buyer |
| FCA | Seller | Seller | Buyer/Seller | Buyer | Buyer | Buyer | Buyer | Buyer | Buyer | Buyer | Buyer | Buyer | Buyer |
| FAS | Seller | Seller | Seller | Seller | Buyer | Buyer | Buyer | Buyer | Buyer | Buyer | Buyer | Buyer | Buyer |
| FOB | Seller | Seller | Seller | Seller | Seller | Buyer | Buyer | Buyer | Buyer | Buyer | Buyer | Buyer | Buyer |
| CPT | Seller | Seller | Seller | Seller | Seller | Seller | Buyer | Buyer/Seller | Buyer/Seller | Buyer | Buyer | Buyer | Buyer |
| CIP | Seller | Seller | Seller | Seller | Seller | Seller | Seller | Buyer/Seller | Buyer/Seller | Buyer | Buyer | Buyer | Buyer |
| CFR | Seller | Seller | Seller | Seller | Seller | Seller | Buyer | Buyer | Buyer | Buyer | Buyer | Buyer | Buyer |
| CIF | Seller | Seller | Seller | Seller | Seller | Seller | Seller | Buyer | Buyer | Buyer | Buyer | Buyer | Buyer |
| DAP | Seller | Seller | Seller | Seller | Seller | Seller | Seller | Seller | Seller | Seller | Buyer | Buyer | Buyer |
| DPU | Seller | Seller | Seller | Seller | Seller | Seller | Seller | Seller | Seller | Seller | Buyer | Buyer | Seller |
| DDP | Seller | Seller | Seller | Seller | Seller | Seller | Seller | Seller | Seller | Seller | Seller | Seller | Buyer |
With all Incoterms beginning with D there is no obligation to provide insurance, however the insurable risk is for the seller's account.
Allocations of risks to buyer/seller according to Incoterms 2020
[edit]The risk and the cost is not always the same for Incoterms. In many cases, the risk and cost usually goes together but it is not always the case. The below represents the transfer of risk.
Rules for sea and inland waterway transport
| Incoterm 2020 | Seller | Carrier | Port | Loading at Port | Onboard | Unloading at Port | Port |
| FAS | Seller | Seller | Seller | Buyer | Buyer | Buyer | Buyer |
| FOB | Seller | Seller | Seller | Seller | Buyer | Buyer | Buyer |
| CFR | Seller | Seller | Seller | Seller | Buyer | Buyer | Buyer |
| CIF | Seller | Seller | Seller | Seller | Buyer | Buyer | Buyer |
Rules for any modes of transport
| Incoterm 2020 | Seller | Carrier | Port | Ship | Port | Terminal | Named place | Unloading at destination |
| EXW | Seller | Buyer | Buyer | Buyer | Buyer | Buyer | Buyer | Buyer |
| FCA | Seller | Seller | Buyer | Buyer | Buyer | Buyer | Buyer | Buyer |
| CPT | Seller | Buyer | Buyer | Buyer | Buyer | Buyer | Buyer | Buyer |
| CIP | Seller | Buyer | Insurance | Insurance | Insurance | Insurance | Insurance | Buyer |
| DAP | Seller | Seller | Seller | Seller | Seller | Seller | Seller | Buyer |
| DPU | Seller | Seller | Seller | Seller | Seller | Seller | Seller | Buyer |
| DDP | Seller | Seller | Seller | Seller | Seller | Seller | Seller | Seller |
Previous Incoterms
[edit]
While these terms do not feature in the current version of Incoterms it is possible that they may be seen in sales order contracts. Care must be taken to ensure that both parties agree on their obligations in this case.
DAF – Delivered at Frontier (named place of delivery)
[edit]This term can be used when the goods are transported by rail and road. The seller pays for transportation to the named place of delivery at the frontier. The buyer arranges for customs clearance and pays for transportation from the frontier to their factory. The passing of risk occurs at the frontier.
DAT – Delivered at Terminal
[edit]This term means that the seller delivers the goods to the buyer to the named terminal in the contract of sale, unloaded from the main carriage vehicle. The seller is responsible for making a safe delivery of goods to the named terminal, paying all transportation and export and transit customs clearance expenses. The seller bears the risks and costs associated with supplying the goods to the delivery terminal and unloading them, where the buyer becomes responsible for paying the duty and taxes, as well as any further carriage to a destination.
DES – Delivered Ex Ship
[edit]Where goods are delivered ex ship, the passing of risk does not occur until the ship has arrived at the named port of destination and the goods made available for unloading to the buyer. The seller pays the same freight and insurance costs as they would under a CIF arrangement. Unlike CFR and CIF terms, the seller has agreed to bear not just cost, but also Risk and Title up to the arrival of the vessel at the named port. Costs for unloading the goods and any duties, taxes, etc. are for the Buyer. Until 2011,[32] DES was a commonly used term in shipping bulk commodities, such as coal, grain, dry chemicals; and where the seller either owned or had chartered their own vessel.
DEQ – Delivered Ex Quay (named port of delivery)
[edit]This is similar to DES, but the passing of risk does not occur until the goods have been unloaded at the port of discharge.
DDU – Delivered Duty Unpaid (named place of destination)
[edit]This term means that the seller delivers the goods to the buyer to the named place of destination in the contract of sale. A transaction in international trade where the seller is responsible for making a safe delivery of goods to a named destination, paying all transportation and export and transit customs clearance expenses. The seller bears the risks and costs associated with supplying the goods to the delivery location, where the buyer becomes responsible for paying the duty and taxes.
FOR - Free on rail and FOT - Free on truck
[edit]These two terms were both included in Incoterms 1953, in each case specifying a named departure point.[5]
Use of Incoterms in Latin American International Trade
In Latin America, Incoterms play a crucial role in facilitating international business by clarifying the responsibilities of buyers and sellers in global transactions. Companies in countries such as Ecuador, Colombia, and Peru use Incoterms to standardize logistics operations, reduce misunderstandings, and ensure compliance with international regulations. The most commonly applied terms in the region are FOB (Free on Board), CIF (Cost, Insurance and Freight), and DAP (Delivered at Place), especially in the export of agricultural and manufactured products.
Ecuadorian exporters of bananas, flowers, and shrimp often rely on FOB terms when shipping to European or North American markets, as this allows them to maintain control until the goods are loaded onto the vessel. On the other hand, importers prefer CIF, which simplifies costs by including insurance and freight in a single price.
Training on Incoterms has also increased in business schools and chambers of commerce across the region. These organizations promote the latest version, Incoterms 2020, published by the International Chamber of Commerce (ICC), which introduced clarifications on cost allocation and security obligations. The use of standardized trade terms contributes to transparency, minimizes disputes, and strengthens regional competitiveness in the global marketplace.
See also
[edit]
References
[edit]- ^ Incoterms 2020
- ^ a b Vishny, Paul H. (1981). Guide to international commerce law. St. Paul, MN: West Group. ISBN 0070675139.
- ^ "ICC Guide to Incoterms® 2010". ICC. Archived from the original on 8 March 2014. Retrieved 14 March 2014.
- ^ "THE INTERPLAY BETWEEN THE INCOTERMS & CISG ON THE INTERNATIO" (PDF).
- ^ a b "Incoterms® 1953" (PDF). UNCITRAL. Retrieved 1 May 2021.
- ^ "Incoterms® 2020". ICC. Archived from the original on 27 January 2020. Retrieved 28 January 2020.
- ^ "Incoterms® 2010". ICC. Archived from the original on 13 March 2014. Retrieved 14 March 2014.
- ^ "From the introduction of Incoterms 2020". ICC. 26 August 2019.
- ^ Incoterms Explained, Freight Insurance, accessed 27 May 2020
- ^ Incoterms® 2020 English Edition
- ^ Brief on Customs Valuation Archived 5 March 2018 at the Wayback Machine Directorate General of Valuation
- ^ "Valuation". sars.gov.za. Archived from the original on 26 April 2018. Retrieved 18 October 2015.
- ^ Mayer, Ray August; with revisions by Don; Bixby, Michael (2013). International business law : text, cases, and readings (6th ed., international ed.). Harlow [etc.]: Pearson. ISBN 978-0273768616.
{{cite book}}: CS1 maint: multiple names: authors list (link) - ^ "Customs Information Paper (11) 89" (PDF). HMRC. Archived from the original (PDF) on 20 December 2016. Retrieved 13 December 2016.
- ^ "Evidence of export". Strong & Herd. Archived from the original on 20 December 2016. Retrieved 13 December 2016.
- ^ Mantissa Elearning, Showdown at the container yard, accessed 28 January 2021
- ^ "Incoterms® rules 2010 - ICC - International Chamber of Commerce". iccwbo.org.
- ^ "Exporting FAQs - Expor.gov - export.gov". www.export.gov. Archived from the original on 2 March 2012. Retrieved 12 May 2016.
- ^ "Delivered Duty Paid - Incoterms Explained". incotermsexplained.com.
- ^ "UN/LOCODE Code List by Country - Trade - UNECE". www.unece.org.
- ^ August, Ray; Mayer, Don; Bixby, Michael B. (2013). International Business Law 6th Edition. Pearson. ISBN 978-0132718974.
- ^ Griffin, Day (2003). The law of international trade (3. ed.). London [u.a.]: Butterworths. ISBN 0406921830.
- ^ Craighill, E. A., Sales of Goods on C. I. F. Terms, Virginia Law Review, Volume 6, No. 4 (January 1920), pp. 229-239, accessed 27 November 2022
- ^ New York Supreme Court, Mee v. McNider, 46 N.Y. Sup. Ct. 345 (N.Y. Sup. Ct. 1886), Court Listener, accessed 27 November 2022
- ^ 7 H & N 574, 158 ER
- ^ University of Southampton, Session 6 - Transfer of Risk: General Principles, from Transfer of risk in commercial sales contracts, accessed 21 May 2021
- ^ House of Lords, E. Clemens Horst Co. v. Biddell Brother, UKHL 680, handed down 3 November 1911, accessed 2 March 2021
- ^ King's Bench Division, Arnhold Karberg & Co v Blythe, Green, Jourdain & Co. (1915) 2 KB 379
- ^ Todd, P., Arnhold Karberg, updated 16 April 1996, archived 3 May 2014, accessed 20 May 2021
- ^ United States Court of Appeals for the Ninth Circuit, Macondray & Co. v. WR Grace & Co., 30 F. 2d 647, 1929, accessed 19 July 2023
- ^ Todd, P., Manbre Saccharine Co. Ltd. v. Corn Products Co. Ltd., Kings Bench Division, 1919 1 K.B. 198, updated 16 February 1999, archived 3 December 2014, accessed 19 July 2023
- ^ CFI Education Inc.,Delivered Ex Ship (DES), accessed 17 August 2021
External links
[edit]- Incoterms rules from the International Chamber of Commerce
- Export.gov: Incoterms® Archived 23 April 2019 at the Wayback Machine
- United Nations Code for Trade and Transport Locations (UN/LOCODE)
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Incoterms
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Definition and Purpose
Incoterms, short for International Commercial Terms, are a set of standardized rules published by the International Chamber of Commerce (ICC) that define the responsibilities of buyers and sellers in the delivery of goods under international sales contracts.[2] These rules specify the point at which the risk of loss or damage to the goods transfers from the seller to the buyer, as well as who bears the costs associated with transportation, insurance, and customs clearance.[1] By providing clear interpretations of common trade terms, Incoterms aim to minimize disputes and misunderstandings in global transactions, ensuring that parties from different legal and cultural backgrounds can agree on obligations without ambiguity.[2] The primary purpose of Incoterms is to facilitate smoother international trade by allocating tasks, costs, and risks involved in the movement of goods from seller to buyer across various modes of transport.[1] They focus exclusively on the delivery aspects of sales contracts, clarifying, for example, when the seller must hand over the goods and under what conditions the buyer assumes responsibility for further logistics.[2] However, Incoterms do not address the transfer of property title or ownership of the goods, which remains governed by separate contractual provisions or applicable national laws.[5] Similarly, they do not cover remedies for breach of contract, product liability, or payment terms, leaving those to the underlying agreement or domestic legislation.[5] Incoterms are non-mandatory and only apply if explicitly incorporated into a contract by reference, such as by stating "Incoterms 2020" alongside the chosen term; without this, default rules under national laws govern the transaction.[1] This voluntary nature allows flexibility while promoting uniformity when adopted. Globally, Incoterms are recognized as the standard for interpreting trade terms in international commerce, used in contracts across more than 120 countries and translated into multiple languages to support diverse markets.[6] The ICC updates these rules periodically—most recently in 2020—to align with evolving trade practices, such as changes in transport technology and security requirements.[3]History and Development
Incoterms, or International Commercial Terms, were first introduced by the International Chamber of Commerce (ICC) in 1936 to standardize interpretations of trade terms in international sales contracts, addressing ambiguities that arose in post-World War I global commerce.[3] The initiative stemmed from earlier ICC efforts in the 1920s, including a 1923 survey across 13 countries that highlighted inconsistencies in commercial practices, leading to the formal codification of six initial terms: FAS (Free Alongside Ship), FOB (Free on Board), C&F (Cost and Freight; although later standardized as CFR in the 1990 revision, C&F and variants like CNF remain in common informal use in trade practice to denote the same responsibilities), CIF (Cost, Insurance, and Freight), Ex Ship, and Ex Quay.[3][7] Subsequent revisions have occurred periodically to adapt to evolving trade dynamics, with key milestones including the 1953 edition, which added terms for rail transport such as DCP (Delivered at and Placed on Board), FOR (Free on Rail), and FOT (Free on Truck); the 1967 update, introducing DAF (Delivered at Frontier) and DDP (Delivered Duty Paid) to clarify border-related responsibilities; and the 1976 revision, which incorporated FOB Airport to accommodate growing air freight usage.[3] Further editions followed in 1980, adding FRC for containerized shipments to reflect the rise of containerization; 1990, simplifying FCA (Free Carrier) and integrating provisions for electronic communications; 2000, adjusting FAS and DEQ (Delivered Ex Quay) for better alignment with customs procedures; 2010, consolidating delivery terms into DAT (Delivered at Terminal) and DAP (Delivered at Place); and 2020, the latest version effective from January 1, 2020.[3][2] The development process is overseen by the ICC through a Drafting Group comprising international trade experts who review and revise the rules approximately every decade based on feedback from global business practitioners, national committees, and emerging trade needs.[1] These updates have been influenced by major shifts, such as the expansion of multimodal transport in the late 20th century, which prompted terms like CPT (Carriage Paid To) and CIP (Carriage and Insurance Paid To), and post-9/11 security regulations that enhanced requirements for transport security in rules like CIP starting from the 2010 edition.[3] The ICC ensures the rules remain relevant by incorporating changes in logistics, technology, and regulatory environments while maintaining their core purpose of allocating risks and costs between buyers and sellers. Incoterms are published exclusively by the ICC in official booklets, with the 2020 edition available through their e-commerce platform, ICC Knowledge 2Go, alongside digital apps and explanatory guides.[2] These resources are translated into more than 30 languages to facilitate worldwide adoption, supported by the ICC's network of over 100 national committees that provide localized training and implementation guidance.[1]Current Version: Incoterms 2020
Key Features and Changes
Incoterms 2020 consists of 11 rules, categorized into seven applicable to any mode of transport—EXW, FCA, CPT, CIP, DAP, DPU, and DDP—and four specific to sea and inland waterway transport—FAS, FOB, CFR, and CIF.[2] This division maintains the framework from prior editions while enhancing usability through consolidated cost listings in articles A9 and B9 for each rule.[2] A primary update replaces the Delivered at Terminal (DAT) rule from Incoterms 2010 with Delivered at Place Unloaded (DPU), broadening the delivery point to any location and requiring the seller to unload the goods, thereby increasing flexibility beyond terminal restrictions.[2] Under FCA, parties may now agree for the buyer to instruct the carrier to issue an on-board bill of lading to the seller, facilitating smoother container shipments and letter-of-credit transactions.[8] Additionally, CIP mandates higher insurance coverage under Institute Cargo Clauses (A) for all risks, diverging from the lower Institute Cargo Clauses (C) default in CIF to better suit multimodal shipments of manufactured goods.[2] All rules now incorporate provisions for allocating security-related costs and obligations, such as screening and customs checks, reflecting post-2010 geopolitical shifts; these are detailed in articles A4/A7 (obligations) and A9/B9 (costs).[9] The rules also accommodate the use of a party's own transport means under FCA, DAP, DPU, and DDP, clarifying that this does not classify the party as a professional carrier and updating language to "contract or arrange at its own cost for the carriage."[8] No entirely new rules were introduced, with revisions emphasizing clarity through explanatory notes, graphics, and applicability to emerging practices like e-commerce and non-containerized shipments.[2]Defined Terms and Abbreviations
Incoterms 2020 establishes a set of standardized terms and abbreviations to promote uniform understanding and application in international sales contracts, facilitating clear allocation of responsibilities between parties. These definitions are integral to the rules published by the International Chamber of Commerce (ICC), ensuring that terms like delivery points and risk transfer are interpreted consistently across global trade.[2]Core Definitions
- Delivery: The point at which the seller completes its delivery obligation under the chosen rule, simultaneously transferring the risk of loss or damage to the buyer; this varies by rule, such as at the seller's premises under EXW or at the destination under DAP.[10]
- Notice of readiness: A communication from the seller to the buyer (or carrier) indicating that the goods are available for collection or handover, as required under articles A10/B10 of the rules to enable timely transport arrangements.[10]
Abbreviations and Placeholders
The Incoterms rules employ three-letter abbreviations to denote specific trade terms, each encapsulating defined responsibilities for delivery, costs, and risks. For instance:- EXW: Ex Works, where the seller makes goods available at its premises.
- FCA: Free Carrier, where the seller hands over goods to the carrier at a named place.
- CPT: Carriage Paid To, where the seller pays for carriage to a named destination.
- CIP: Carriage and Insurance Paid To, including insurance to the destination.
- DPU: Delivered at Place Unloaded, where the seller unloads at the destination.
- DAP: Delivered at Place, where goods are made available ready for unloading.
- DDP: Delivered Duty Paid, including import clearance and duties.
Insurance Terms
Incoterms 2020 differentiates between the contract of carriage, the agreement under which goods are transported by a carrier, and the contract of insurance, a separate arrangement for coverage against loss or damage during transit. Under CIP, the seller procures insurance providing minimum coverage equivalent to Institute Cargo Clauses (A), offering all-risk protection; under CIF, coverage aligns with Institute Cargo Clauses (C), which is more limited.[10]Party Roles
- Seller: The party obligated to deliver the goods in accordance with the rule, handling export formalities, carriage (in C rules), and unloading (in DPU).
- Buyer: The party that receives the goods post-delivery, assumes risk thereafter, and manages import formalities unless specified otherwise.
- Carrier: A third-party transporter engaged by the seller or buyer, responsible for the goods during the contracted leg of the journey but not a primary contracting party in the sales agreement.
Exclusions
Incoterms rules explicitly exclude provisions on payment terms, such as letters of credit or pricing, as well as intellectual property rights, product specifications, or remedies for breach of contract, focusing solely on delivery-related obligations.[10]Multimodal Transport Rules
EXW – Ex Works
Under the EXW (Ex Works) rule in Incoterms 2020, the seller fulfills its delivery obligation by making the goods available to the buyer at the seller's premises, such as a factory, warehouse, or other specified location, without loading them onto any transport.[11] This represents the minimum level of obligation for the seller among all Incoterms rules, placing the primary responsibility for export formalities, transportation, and associated risks on the buyer from the outset.[11] The seller's obligations under EXW are limited to preparing the goods in conformity with the sales contract, including appropriate packaging and marking, and providing the buyer with a commercial invoice as proof of delivery.[11] The seller must also supply any necessary evidence of conformity if stipulated in the contract but has no duty to handle loading, export clearance, or any transportation arrangements unless otherwise agreed upon by the parties.[11] All costs related to production, preparation, and making the goods available at the premises are borne by the seller.[11] In contrast, the buyer's obligations commence immediately upon the goods being made available and include arranging and paying for loading at the seller's premises, all export and import formalities (such as obtaining licenses and paying duties), transportation to the final destination, unloading, and any insurance.[11] The buyer assumes full responsibility for all costs and risks after this point, including export duties and security-related measures for transport.[11] Risk transfers from the seller to the buyer at the moment the goods are placed at the disposal of the buyer at the named premises, ready for collection.[11] Costs similarly shift to the buyer for everything beyond the seller's premises, encompassing loading, carriage, insurance, and terminal handling.[11] EXW is particularly suitable for scenarios where the buyer has strong control over the logistics chain and prefers to manage export processes themselves, as it minimizes the seller's involvement and allows the buyer to optimize transport and customs arrangements.[11] For instance, it may be less ideal for buyers unfamiliar with the seller's country export requirements, in which case a rule like FCA could provide slightly more seller assistance with handover to a carrier.[11]FCA – Free Carrier
The Free Carrier (FCA) rule under Incoterms 2020 stipulates that the seller delivers the goods, cleared for export, to the carrier or another person nominated by the buyer at the seller's premises or another named place.[2] This multimodal rule applies to any mode of transport, providing flexibility for both containerized and non-containerized shipments by shifting responsibility for main carriage to the buyer early in the process.[2] Delivery under FCA can occur at the seller's premises, where the seller loads the goods onto the buyer's transport, or at a specified location such as a terminal or freight forwarder's facility, where the buyer assumes loading responsibility.[2] A key feature introduced in Incoterms 2020 allows the parties to agree that, for sea or inland waterway transport using the seller's vehicle, the buyer will instruct the carrier to issue an on-board bill of lading to the seller after loading, facilitating smoother documentation for container shipments.[2] The seller's obligations include handling all export clearance formalities, such as obtaining necessary licenses and paying associated duties, and providing the buyer with commercial invoices and any required export documents.[2] If delivery is at the seller's premises, the seller must also package the goods appropriately and load them onto the arriving transport at their own expense.[2] These responsibilities ensure the goods are ready for onward movement without delays attributable to the seller.[2] In contrast, the buyer is responsible for contracting and paying for the main carriage from the named place of delivery, as well as arranging import clearance, including any duties, taxes, and import documentation upon arrival.[2] The buyer also bears the risk of loss or damage once the goods are handed over to the carrier, and must reimburse the seller for any agreed costs related to the on-board bill of lading if applicable.[2] Risk transfers from the seller to the buyer at the point when the goods are placed under the control of the carrier or other nominated party at the named place, whether loaded or not, depending on the delivery location.[2] Costs are allocated such that the seller covers all expenses up to delivery, including export formalities and loading at their premises, while the buyer assumes freight, insurance (if desired, as an enhanced option under the related CIP rule), and subsequent handling charges.[2] FCA's versatility makes it suitable for a wide range of international transactions, particularly where the buyer prefers control over transport arrangements, and it contrasts with rules like EXW by placing export clearance duties on the seller rather than the buyer.[2]CPT – Carriage Paid To
CPT (Carriage Paid To) is an Incoterms rule applicable to any mode of transport, where the seller assumes responsibility for arranging and paying for the main carriage of goods to a named place of destination, while the risk of loss or damage transfers to the buyer at an earlier point upon handover to the first carrier.[12] This rule facilitates international sales where the seller prefers to control the initial transport logistics but seeks to limit ongoing risk exposure.[13] Under CPT, the seller must ensure the goods are delivered to the carrier or another party designated by the seller at the agreed point, marking the point of risk transfer, regardless of whether the transport involves multiple modes such as road, rail, air, or sea.[2] The seller's primary obligations include contracting for the carriage of goods to the named destination and covering the associated freight costs, as well as handling all export clearance procedures, including obtaining any necessary export licenses and complying with security-related requirements for transport.[12] Additionally, the seller must provide the buyer with the commercial invoice and any transport documents, such as the contract of carriage, to enable the buyer to claim the goods at destination.[13] The seller bears the costs and risks until the goods are handed over to the first carrier, including pre-shipment inspections if required by the contract.[2] In contrast, the buyer's obligations commence upon the transfer of risk, requiring them to arrange and pay for unloading at the destination, as well as all import formalities, duties, taxes, and any onward transportation beyond the named place.[12] The buyer assumes responsibility for obtaining import licenses and handling customs clearance in the destination country and any transit countries, while also bearing the costs of insurance for the goods during transit if desired, since the seller has no such obligation under CPT.[13] Risk under CPT transfers from the seller to the buyer at the moment the goods are delivered to the first carrier at the agreed place, which could be a warehouse, terminal, or other specified point, rather than upon arrival at the destination.[2] This early transfer protects the seller from liability for issues arising during the main carriage, even though they pay for it.[12] Cost allocation in CPT divides expenses clearly: the seller covers all costs related to delivery to the first carrier, export formalities, and the freight charges to the named destination, while the buyer handles insurance premiums, import duties, and any additional costs from the point of risk transfer onward.[13] This structure ensures the seller's financial responsibility ends with payment for carriage, shifting subsequent expenses to the buyer.[2] CPT is particularly suitable for scenarios involving multimodal transport where the seller has established relationships with carriers and wishes to manage export logistics, but the buyer is better positioned to handle import processes and assumes risk early to align with their control over insurance arrangements.[12] Unlike CIP, which requires the seller to procure insurance coverage to the destination, CPT leaves insurance entirely to the buyer, making it preferable when the parties agree the buyer should manage transit protection.[13]CIP – Carriage and Insurance Paid To
Under the CIP (Carriage and Insurance Paid To) rule in Incoterms 2020, the seller assumes responsibility for arranging and paying for the main carriage of the goods to a named destination and procuring minimum insurance coverage for the buyer during transit, while risk transfers to the buyer upon delivery of the goods to the first carrier.[14] This term is applicable to any mode of transport or combination thereof, making it suitable for multimodal shipments such as containerized goods transported by road, rail, air, or sea.[12] It is particularly preferred for high-value goods where the seller wants to provide basic protection against transit risks without bearing the full delivery obligations at the destination.[14] The seller's key obligations include completing all export clearance formalities, contracting with the carrier for transport to the named place of destination, and obtaining insurance coverage that complies with Institute Cargo Clauses (A) for all-risks protection, covering at least 110% of the goods' invoice value plus any additional costs incurred.[12] The seller must also hand over the insurance policy or certificate to the buyer, enabling the buyer to claim under it if necessary, though the buyer may procure additional coverage if desired.[14] In the 2020 edition, the insurance requirement for CIP was enhanced to require more comprehensive coverage under Institute Cargo Clauses (A), providing all-risks protection unlike the minimum coverage under CIF for sea transport.[8] The buyer's primary responsibilities encompass handling all import formalities, including customs clearance and payment of duties at the destination, as well as unloading the goods unless otherwise agreed.[12] Risk of loss or damage transfers to the buyer at the same point as under CPT—when the goods are handed over to the first carrier at the named place—regardless of whether the insurance covers the full journey.[14] Regarding cost allocation, the seller bears the expenses for carriage to the destination, minimum insurance, and export-related costs, while the buyer covers import duties, onward transport beyond the named place if needed, and any risks after the transfer point.[12] This division ensures the seller manages initial logistics and protection, shifting subsequent burdens to the buyer upon carrier handover.[14]DPU – Delivered at Place Unloaded
The DPU (Delivered at Place Unloaded) rule under Incoterms® 2020 stipulates that the seller delivers the goods by placing them at the buyer's disposal, unloaded, at the named place of destination, which can be any location agreed upon by the parties.[2] This term applies to any mode of transport or combination thereof and replaces the previous Delivered at Terminal (DAT) rule from Incoterms® 2010, expanding the scope beyond just terminals to encompass broader delivery points such as warehouses or construction sites.[2] Under DPU, the seller bears responsibility for handling all export clearance formalities, arranging and paying for the main carriage to the named destination, and performing the unloading of the goods at that location.[15] The seller assumes all risks and costs associated with these obligations up to the point of unloading, but does not handle import clearance or pay any import duties, taxes, or other charges.[2] For example, in a transaction involving perishable goods like flowers shipped from Colombia to a refrigerated terminal in Le Havre, France, the seller would manage export formalities, transport, and unloading at the terminal.[15] The buyer, in turn, is obligated to handle import clearance, including payment of any duties and taxes, and to arrange and bear the costs of any onward transport beyond the named place if required.[2] Risk of loss or damage to the goods transfers from the seller to the buyer immediately upon completion of unloading at the destination.[15] Costs are allocated such that the seller covers all expenses incurred until the goods are unloaded at the named place, including carriage, insurance if applicable, and unloading charges, while the buyer assumes responsibility for subsequent costs, including import-related fees.[2] This allocation ensures clarity in financial responsibilities during international transactions. DPU is particularly suitable for scenarios where the seller has the capability and agreement to safely unload the goods at the destination, such as deliveries directly to a buyer's warehouse or job site, offering flexibility for non-terminal locations.[15] A key change in Incoterms® 2020 was broadening the rule from the terminal-specific focus of DAT to any named place, emphasizing the seller's unloading obligation as the primary distinction from DAP, where unloading remains the buyer's duty.[2]DAP – Delivered at Place
Delivered at Place (DAP) is an Incoterms rule applicable to any mode of transport, where the seller assumes responsibility for delivering the goods to a named place of destination in the buyer's country, making them available to the buyer ready for unloading on the arriving means of transport. Under this rule, the seller bears all risks and costs associated with transporting the goods until they reach the specified destination, but the buyer takes over from the point of unloading. This term facilitates clear division of responsibilities in international sales contracts, particularly for multimodal shipments.[16] The seller's obligations under DAP include arranging and paying for the main carriage to the named place, handling all export clearance formalities and associated costs, and ensuring the goods are delivered on the arriving means of transport without unloading them. The seller must also provide the buyer with necessary documentation for import formalities and bear any transit customs requirements. Unlike rules requiring insurance, such as CIP, the seller has no obligation to insure the goods under DAP.[13][16] The buyer's obligations commence upon the goods' arrival at the destination, including unloading the goods from the arriving transport at their own risk and expense, completing import customs formalities, and covering all subsequent costs such as duties, taxes, and onward transportation. The buyer must also reimburse the seller for any security-related costs incurred during export or transit if applicable under Incoterms 2020 provisions.[13][16] Risk of loss or damage transfers from the seller to the buyer at the moment the goods are placed at the buyer's disposal at the named place, ready for unloading, which occurs after arrival but before any unloading takes place. This transfer point ensures the seller is not liable for issues during the buyer's unloading process.[13][16] Costs are allocated such that the seller covers all expenses up to delivery at the named place, including transportation, export formalities, and any pre-shipment inspections, while the buyer assumes costs from unloading onward, encompassing import duties, taxes, and post-delivery handling. This structure helps in budgeting, as the seller's maximum exposure is defined by the destination point.[13][16] DAP is particularly suitable for door-to-door deliveries in scenarios where the buyer prefers to manage import processes themselves, offering flexibility across transport modes without the seller assuming unloading or duty responsibilities, unlike the more comprehensive DDP rule which extends to paid import duties.[16]DDP – Delivered Duty Paid
Delivered Duty Paid (DDP) is an Incoterms 2020 rule applicable to any mode or modes of transport, under which the seller assumes maximum responsibility by delivering the goods to the named place of destination, cleared for import, and with all applicable duties, taxes, and other charges paid.[13][17] This rule requires the seller to handle all transportation, risks, and formalities up to the point where the goods are made available to the buyer, ready for unloading at the specified destination.[18] Unlike DAP, where the seller delivers goods to the named place without handling import clearance or duties, DDP extends the seller's obligations to include these import-related responsibilities.[13] The seller's obligations under DDP encompass providing the goods and commercial invoice as per the contract, as well as proof of conformity (such as certificates or other evidence required by the contract) and any transport or delivery documents necessary to allow the buyer to take possession of the goods; handling all export and import customs formalities, including obtaining licenses, making declarations, performing security checks, inspections, and paying any associated duties, taxes, fees, and charges; arranging and paying for the main carriage to the destination.[17] Additionally, the seller must bear all risks of loss or damage until the goods are placed at the buyer's disposal at the named place, provide transport documents if required, and notify the buyer once delivery is ready, though the seller has no obligation to insure the goods unless agreed otherwise.[13] Unloading at the destination is the buyer's responsibility unless otherwise specified in the contract.[18] In contrast, the buyer's obligations are minimal: paying the agreed price, taking delivery of the goods at the named destination, assisting the seller, where applicable and at the seller's request and expense, in obtaining any necessary import-related documents or information, accepting proof of delivery, and assuming all risks and costs from that point onward, including any post-delivery handling or further transport. The buyer has no primary responsibility for export/import clearance or most documentation.[17] Risk transfers from seller to buyer precisely when the goods are made available, ready for unloading, at the named place of destination.[13] Cost allocation under DDP places the full burden on the seller for all expenses incurred up to and including delivery at the destination, such as transport, export and import clearance, duties, taxes, and any security-related costs, while the buyer incurs only costs related to unloading and subsequent handling.[18] This rule is rarely used in practice due to the significant challenges it imposes on the seller, particularly in navigating unfamiliar import regulations and procedures in the buyer's country; it is most suitable when the seller has a local presence or established import expertise to manage these complexities effectively.[17]Sea and Inland Waterway Rules
FAS – Free Alongside Ship
Free Alongside Ship (FAS) is an Incoterm rule specifically designed for sea and inland waterway transport, under which the seller fulfills its delivery obligation by placing the goods alongside the vessel nominated by the buyer at the named port of shipment.[19][13] This point of delivery marks the transfer of risk from the seller to the buyer, making FAS suitable for scenarios where the buyer assumes control over loading and subsequent carriage.[19] The rule emphasizes the seller's responsibility up to the quayside or barge, without involving the vessel's deck.[20] Under FAS, the seller's primary obligations include transporting the goods to the named port of shipment and placing them alongside the vessel within the agreed period, ensuring they are free from defects and ready for loading.[19] The seller must also handle all export clearance formalities, including obtaining necessary licenses and providing the commercial invoice and any required documentation to the buyer.[13] Additionally, the seller is required to give the buyer sufficient notice of the delivery so that the buyer can arrange for the vessel's arrival.[19] The buyer's obligations commence once the goods are placed alongside the ship, including contracting and paying for the main carriage, loading the goods onto the vessel, and covering all associated costs such as stevedoring and handling at the port.[19] The buyer is also responsible for arranging and paying for insurance from that point onward, as well as handling import clearance and any duties or taxes upon arrival at the destination.[13] Prior to delivery, the buyer must notify the seller of the vessel's name, loading point, and required delivery time to enable proper placement of the goods.[19] Risk transfers from the seller to the buyer at the moment the goods are placed alongside the vessel on the quay or in a barge at the named port of shipment, provided this occurs during business hours and within the agreed timeframe.[19][13] Any damage or loss occurring after this point falls under the buyer's responsibility.[20] Costs under FAS are allocated such that the seller bears all expenses related to delivering the goods to the port and placing them alongside the vessel, including inland transport, export formalities, and any port handling up to that point.[19] The buyer assumes responsibility for loading costs, ocean freight, insurance, unloading at destination, and import-related expenses.[13] FAS is traditionally used for break-bulk or bulk cargo, such as minerals, grain, or heavy machinery, where goods can be directly placed alongside the ship for loading without containerization.[20][21] It is less common in modern containerized shipments, where a shift to FOB is often preferred for on-board delivery to better align with container terminal practices.[19]FOB – Free on Board
FOB, or Free on Board, is an Incoterm rule applicable exclusively to sea and inland waterway transport, where the seller fulfills its delivery obligation by loading the goods on board the vessel nominated by the buyer at the named port of shipment.[19] At this point, the risk of loss or damage to the goods transfers from the seller to the buyer, marking a clear division in responsibilities that favors scenarios where the buyer arranges the main carriage.[22] This rule, introduced in the Incoterms 1936 edition by the International Chamber of Commerce (ICC), has evolved to accommodate modern shipping practices, shifting the risk transfer point from the traditional "ship's rail" to when the goods are fully loaded on board the vessel.[2] The seller's primary obligations under FOB include preparing and packaging the goods for export, handling all export clearance formalities, and transporting the goods to the named port of shipment at its own expense.[19] Upon receiving notice from the buyer regarding the vessel's details, the seller must load the goods onto the vessel, bearing all associated costs and risks until that moment, and provide the buyer with an on-board bill of lading or equivalent transport document as proof of delivery.[23] If requested by the buyer, the seller may also assist in obtaining information for carriage contracts, though at the buyer's risk and expense.[22] In contrast, the buyer's responsibilities commence with nominating the vessel and providing timely notice to the seller, followed by contracting and paying for the main ocean freight, unloading at the destination port, and managing all import customs formalities, duties, and onward transportation.[19] The buyer assumes all risks and costs from the moment the goods are on board, including insurance if desired, and must reimburse the seller for any loading costs incurred if the vessel is not ready on time.[23] Cost allocation under FOB divides expenses at the point of loading: the seller covers all costs up to and including placement on board, such as inland transport, export handling, and loading fees, while the buyer pays for ocean freight, insurance, unloading, and destination charges.[22] This structure ensures the seller's involvement ends at the port of export, with the buyer gaining control over the sea voyage. FOB is particularly suitable for bulk or non-containerized sea shipments where the buyer nominates the vessel and seeks to minimize seller exposure to international transport risks.[19]CFR – Cost and Freight
CFR, or Cost and Freight, is an Incoterm rule applicable exclusively to sea and inland waterway transport, where the seller assumes responsibility for the costs and freight necessary to deliver the goods to the named port of destination.[2] Under this rule, the seller arranges and pays for the main carriage to the destination port, but the risk of loss or damage to the goods transfers to the buyer at the point when the goods are loaded on board the vessel at the port of shipment.[24] This structure balances the seller's control over export logistics with the buyer's assumption of risks during ocean transit, making it distinct from rules like CPT, which apply to non-maritime modes.[2] Although CFR is the official Incoterms designation, in trade practice and older quotations it is commonly referred to informally as C&F (Cost and Freight), C+F, or CNF. For example, "C&F Tunis" indicates Cost and Freight to the port of Tunis (Tunisia), meaning the seller bears the costs of the goods and freight charges to the destination port, while the buyer is responsible for insurance and any further costs beyond arrival at the port.[7][25] The seller's primary obligations under CFR include providing the goods in accordance with the contract, along with necessary commercial invoices and transport documents such as the bill of lading.[24] The seller must handle all export clearance formalities, including obtaining any required export licenses or permits, and bear the associated costs and risks until the goods are placed on board the vessel at the shipment port.[2] Additionally, the seller contracts for and pays the freight charges to transport the goods to the named destination port, ensures the goods are loaded on board, and provides timely notice to the buyer once loading is completed.[24] In contrast, the buyer's obligations commence with assuming all risks of loss or damage to the goods from the moment they are on board the vessel at the origin port.[2] The buyer is responsible for arranging and paying for any insurance coverage desired during transit, as well as handling unloading costs at the destination port, import clearance procedures, and payment of any import duties, taxes, or other charges.[24] The buyer must also accept delivery of the goods upon arrival at the named port and provide any necessary instructions to the seller regarding the destination details.[2] Risk under CFR transfers definitively when the goods are loaded on board the ship at the port of shipment, marking the point where the seller's delivery obligation is fulfilled.[24] From this moment, any subsequent perils during the voyage, such as damage from storms or handling errors, fall on the buyer, even though the seller continues to cover the freight costs to the destination.[2] Cost allocation in CFR emphasizes the seller's payment for all expenses up to loading at the origin port, including export formalities and the full ocean freight to the destination port, while the buyer covers insurance premiums, unloading fees, and all onward transportation or import-related expenses beyond the arrival port.[24] This division ensures the seller manages the primary shipping contract without extending to post-arrival liabilities.[2] CFR is particularly suitable for scenarios where the seller prefers to arrange and control sea freight arrangements, such as for bulk commodities, but the buyer wishes to manage insurance independently, often due to better access to coverage or specific policy needs.[24] It is commonly used in bulk cargo shipments where direct vessel access simplifies loading, avoiding the need for seller-provided insurance as in CIF.[2]CIF – Cost, Insurance and Freight
CIF, or Cost, Insurance and Freight, is an Incoterms® 2020 rule specifically designed for sea and inland waterway transport, where the seller assumes responsibility for the cost of the goods, procurement of insurance, and payment of freight charges to deliver the goods to the named port of destination.[14][13] Under this term, delivery occurs when the goods are loaded on board the vessel nominated by the seller at the port of shipment, at which point the risk of loss or damage transfers to the buyer.[24] This rule is particularly suited for transactions involving containerized or bulk cargo shipped via maritime routes, providing a clear division of responsibilities that balances the seller's control over export logistics with the buyer's assumption of subsequent risks.[14] The seller's primary obligations under CIF include preparing the goods for export, handling all export clearance formalities, and contracting for the carriage of the goods to the named destination port, covering the associated freight costs.[13] Additionally, the seller must obtain insurance coverage for the goods during transit, providing the minimum level specified under Clause C of the Institute Cargo Clauses (or an equivalent policy), which typically covers major perils such as fire, explosion, and vessel stranding but excludes war risks and strikes unless separately arranged.[14][24] The seller is also required to provide the buyer with a transport document, such as a negotiable bill of lading, that proves delivery and enables the buyer to claim the goods at the destination.[24] These duties ensure the seller manages the initial logistics chain, but the buyer receives the necessary documentation to pursue insurance claims directly if needed.[24] In contrast, the buyer's responsibilities commence upon the transfer of risk at the point of loading on board the vessel, including bearing all costs and risks from that moment onward, such as unloading at the destination port and any further inland transport.[14] The buyer must handle import customs formalities, pay any applicable duties, taxes, and fees, and arrange for the receipt of the goods upon arrival.[13] If the goods require transshipment or transit through additional ports, the buyer assumes responsibility for any import-related procedures in those locations.[14] This allocation emphasizes the buyer's role in post-shipment management, particularly in jurisdictions with complex import regulations. The transfer of risk under CIF is a critical feature, occurring when the goods are loaded on board the vessel at the port of shipment, regardless of whether the destination port is reached without incident.[24] Costs are similarly delineated: the seller covers the price of the goods, export packaging, freight to the destination port, and the aforementioned minimum insurance premium, while the buyer pays for port charges at destination, import clearance, and any additional insurance if desiring broader coverage beyond Clause C.[14][13] This structure helps mitigate disputes by fixing the point of risk transition early in the voyage, though it places the onus on the buyer to monitor the carrier's performance during the sea leg. Insurance under CIF is arranged and paid for by the seller but benefits the buyer, who becomes the insured party and can claim directly from the insurer using the provided policy.[24] The minimum coverage required—Institute Cargo Clauses (C)—protects against a limited set of risks, such as generalized damage from washing overboard or collision, but excludes all risks coverage available under Clause A (as used in CIP).[14] Parties may negotiate for enhanced insurance, but the default is the lower threshold to keep costs manageable for the seller.[24] This provision is especially relevant for commodities like agricultural products or electronics, where partial coverage suffices for standard maritime perils. In practice, CIF is commonly used in bulk shipments, such as oil or grain, where sellers in exporting countries like those in the Middle East or South America deliver to major import hubs in Europe or Asia.[13] Compared to CFR (Cost and Freight), which omits seller-provided insurance, CIF offers added protection for the buyer during ocean transit, making it preferable when the buyer lacks established marine insurance arrangements.[24] However, it is not suitable for air or multimodal transport beyond waterways, and users must specify the exact port of destination to avoid ambiguity.[14] Overall, CIF promotes efficiency in international trade by clarifying liabilities, though parties should consult legal experts to adapt it to specific contracts.[13]| Aspect | Seller's Responsibility | Buyer's Responsibility |
|---|---|---|
| Delivery Point | Loading on board vessel at port of shipment | Receipt at destination port after unloading |
| Transport Contract | Arrange and pay carriage to named destination port | Inland transport from destination port |
| Insurance | Minimum coverage (Institute Cargo Clauses C) | Additional coverage if needed; claims handling |
| Customs Clearance | Export formalities | Import formalities and duties |
| Risk Transfer | Until goods on board at shipment port | From loading on board onward |
| Costs Covered | Goods cost, freight, insurance premium, export charges | Unloading, import taxes, onward transport |
Cost and Risk Responsibilities
Allocation of Costs
The allocation of costs under Incoterms 2020 delineates the financial responsibilities of the buyer and seller for various aspects of international trade transactions, including formalities, transportation, and ancillary expenses. These rules, published by the International Chamber of Commerce (ICC), standardize the division to facilitate smoother negotiations and reduce misunderstandings in contracts.[2] Each Incoterm specifies costs in articles A9 (seller's costs) and B9 (buyer's costs), covering everything from export procedures to final delivery.[2] The 11 rules are divided into seven for any mode of transport (EXW, FCA, CPT, CIP, DAP, DPU, DDP) and four for sea or inland waterway transport (FAS, FOB, CFR, CIF), with cost divisions reflecting the point of delivery.[26]| Cost Category | EXW | FCA | CPT | CIP | DAP | DPU | DDP | FAS | FOB | CFR | CIF |
|---|---|---|---|---|---|---|---|---|---|---|---|
| Export Formalities | B | S | S | S | S | S | S | S | S | S | S |
| Loading at Origin | B | S | S | S | S | S | S | S | S | S | S |
| Main Carriage | B | B | S | S | S | S | S | B | B | S | S |
| Insurance | B | B | B | S | B | B | B | B | B | B | S |
| Unloading at Destination | B | B | B | B | B | S | B | B | B | B | B |
| Import Duties/Formalities | B | B | B | B | B | B | S | B | B | B | B |
Allocation of Risks
In Incoterms 2020, the allocation of risks refers to the precise point at which responsibility for loss of or damage to the goods transfers from the seller to the buyer, distinct from the division of costs. This transfer occurs at the moment of delivery as defined by each rule, ensuring clarity in international trade contracts to prevent disputes over liability during transit. The International Chamber of Commerce (ICC) emphasizes that these points are critical for managing potential perils like theft, damage, or loss, with the seller bearing risk until delivery and the buyer thereafter, unless insurance is specified.[2][13] The rules exhibit distinct patterns in risk allocation based on the groups: E and F terms (EXW, FCA, FAS, FOB) shift risk early, typically at the seller's premises or handover to the first carrier or port, placing most transit risks on the buyer. C terms (CPT, CIP, CFR, CIF) transfer risk at the point of shipment or handover to the carrier, despite the seller covering carriage costs to the destination. D terms (DAP, DPU, DDP) delay the shift until arrival at the named destination, with the seller retaining risk through much of the journey. Sea and inland waterway rules (FAS, FOB, CFR, CIF) generally transfer risk at the port of shipment, aligning with maritime practices where ocean voyage risks fall to the buyer.[13][18] To illustrate these transfer points across the transport lifecycle, the following table summarizes risk responsibility by key stages for each Incoterms 2020 rule. Stages include pre-carriage (from origin to initial handover), main carriage (primary international transport), on arrival (at destination port or place), and post-delivery (final unloading or receipt). Cells indicate the party bearing risk (Seller or Buyer) during that stage, with the transfer occurring at the boundary. This structure highlights how risks align with delivery obligations, based on ICC guidelines.[13][2]| Stage | EXW | FCA | CPT/CIP | DAP | DPU | DDP | FAS | FOB | CFR/CIF |
|---|---|---|---|---|---|---|---|---|---|
| Pre-carriage (origin to handover/carrier) | Seller | Seller | Seller | Seller | Seller | Seller | Seller | Seller | Seller |
| Main carriage (international transport) | Buyer | Buyer | Buyer | Seller | Seller | Seller | Buyer | Buyer | Buyer |
| On arrival (destination port/place, ready for unloading) | Buyer | Buyer | Buyer | Seller/Buyer* | Seller | Seller/Buyer* | Buyer | Buyer | Buyer |
| Post-delivery (unloading/receipt at final place) | Buyer | Buyer | Buyer | Buyer | Buyer | Buyer | Buyer | Buyer | Buyer |