Incoterms (international commercial terms) are an established and internationally accepted set of rules in contracts for the shipping and sale of goods around the world. They were established by the International Chamber of Commerce in 1936, to designate which party is responsible for paying a specific segment of the global transportation of goods process and who is responsible during each segment.
EXW – EX WORKS (NAMED PLACE OF DELIVERY)
The seller is required to make goods ready for pickup at his or her own place of business, or on a specified one. If both parties decide that the seller will load them this has to be specified clearly in the contract as it’s not included in the EXW term of sale.
Also the clearance of Customs and the export documentation are also part of the buyer’s duties.
FCA – FREE CARRIER (NAMED PLACE OF DELIVERY)
Designates the location the seller is to deliver the goods. The cost of transportation is included in the price set by the seller, and the risk of loss is initially on the seller, transferring to the buyer upon delivery to the carrier.
FAS – FREE ALONGSIDE SHIP (NAMED PORT OF SHIPMENT)
Here the seller is required to deliver the goods to the dock alongside the buyer’s ship at the agreed port of shipment and have the goods cleared for export. The buyer then assumes the costs and risks involved with the goods transportation.
FOB – FREE ON BOARD (NAMED PORT OF SHIPMENT)
The seller is responsible for all the costs and risks until the goods are delivered on board the ship including export clearance. The buyer is responsible for paying the ocean freight costs, bill of lading fees, insurance, unloading and transportation charges from there to final destination.
It’s important to note that FOB should only be used for non-containerized ocean freight and inland waterway transportation of goods. For other shipping modes FCA should be used instead.
CFR – COST AND FREIGHT (NAMED PORT OF DESTINATION)
The seller is responsible for paying the transportation of the goods up to the destination port and export clearance. The risk transfers from seller to buyer as soon as the goods have been loaded on board the ship at the export country. The delivery from the destination port to the buyer’s premises lays upon the buyer as well as the insurance costs.
CIF – COST, INSURANCE & FREIGHT (NAMED PORT OF DESTINATION)
This mode is very similar to the previous CFR but the seller must also insure the goods while traveling to its agreed destination.
CPT – CARRIAGE PAID TO (NAMED PLACE OF DESTINATION)
Here the seller has to pay the export clearance and shipping costs to agreed place of destination. Goods are delivered when received by the first carrier, risk then transfers to the buyer party. If buyer prefers the seller to insure the goods, CIP mode might be the best solution.
CIP – CARRIAGE AND INSURANCE PAID TO (NAMED PLACE OF DESTINATION)
This mode is very similar to the previous CPT with the added benefit to the buyer that the seller has to insure the goods while travelling to its agreed destination.
The CIP mode is a valid option for every kind of shipping while the CIF mode (at the end of this list) is to be used only for non-containerized ocean freight and inland waterway transport of goods.
DAT – DELIVERED AT TERMINAL (NAMED TERMINAL AT PORT OR PLACE OF DESTINATION)
Under this mode of shipping the seller has to deliver the goods and unload at the agreed upon terminal. The seller party assumes all the transportation costs (export charges, transport, unloading from main carrier at the destination harbor and, if present, destination port charges) as well as all the risk until the goods arrive at the agreed port or terminal.
The buyer is responsible for all the costs incurred after unloading (as could be import duties, taxes, customs, etc).
DAP – DELIVERED AT PLACE (NAMED PLACE OF DESTINATION)
The obligations of the seller are considered finished when the goods are ready to be unloaded in the chosen transportation method at the agreed place of destination. At this precise moment the risk transfers from the seller to the buyer. The seller is responsible for the packing of the goods at origin, as well as the export clearance. The seller assumes all the transportation costs up to the agreed place of destination, where the buyer has to cope with the unloading cost.
When the goods arrive in the destination country, the buyer is responsible for the customs clearance process as well as the payment of the necessary duties and taxes.
DDP – DELIVERY DUTY PAID (NAMED PLACE OF DESTINATION)
This is the maximum obligation that can be assumed by a seller. It’s at the opposite side of the spectrum from the FCA mode. The selling party has to deliver the goods at the agreed place of destination, and has to pay all the transportation costs, duties and taxes. The only part which is not its responsibility is the final unloading of the goods.
As the seller has to obtain all the necessary import authorizations, and pay all the customs and taxes needed in the destination country, this mode can be very risky for the seller if the destination country’s legal regulations are not very well known.