Incoterms, or terms of sale, are used in international sales and purchases. They precisely define the allocation of costs and risks between the exporter and importer when entering into the sales contract.
The term Incoterm is the abbreviation of “International Commercial Terms”.
Each Incoterm consists of three letters and must be linked to a place of delivery.
Incoterms describe the obligations of the seller and the buyer in a commercial transaction. More specifically, they apply to the delivery of goods sold and determine the allocation of formalities, costs and risks associated with importing and exporting them.
Contractors must ensure that they refer to the same version of Incoterms. The most recent update dates from 2010 and includes changes compared to earlier versions. It is therefore recommended to clearly indicate, for example, that the contract is governed by Incoterms 2010.
Incoterms are a legal element to be integrated from the start of commercial negotiations. They allow a common language to be used regardless of the language or geographical location, and to be applicable, the Incoterm chosen in the contract must be clearly specified geographically.
Incoterms can be divided into two categories:
Incoterms specific to multimodal transport (seven in total):
- EXW – (Ex Works)
(Ex Works). The seller (exporter) makes the goods available to the buyer at his premises. The buyer is responsible for all transport costs, customs duties, insurance, and assumes risk of loss once the goods are placed at the factory gates. The “Ex-Works” price does not include loading the goods onto the vehicle, nor customs clearance. To be avoided when export customs procedures apply. Mainly used in intra-community exchanges.
- FCA - Free Carrier
(Free Carrier). The seller (exporter) clears the goods for export and delivers them to the carrier at the location specified by the buyer. This location may be the seller’s factory or the carrier’s premises. If the chosen location is the seller’s warehouse, the seller must load the goods onto the transport vehicle. From that point, the buyer assumes the risk of loss and the cost of transport to the final destination.
- CPT - Carriage Paid To
(Carriage paid to…). The seller (exporter) clears the goods for export and covers transport costs to the agreed destination. Risk transfers once the goods are handed over to the carrier. The buyer then bears risks of loss or theft.
- CIP - Cost, Insurance and Freight
(Carriage paid, insurance included up to…). The seller (exporteur) transports the goods to the agreed destination and handles export customs formalities. The seller is responsible for transport and insurance costs to the agreed destination. The buyer assumes all other costs and risks of loss.
- DAT - Delivered At Terminal
(Delivered at Terminal). The seller delivers, unloads, and makes the goods available to the buyer at the designated terminal in the port or any agreed terminal.
- DAP - Delivered At Place
(Delivered at Destination). The seller delivers the goods and makes them available to the buyer on the means of transport, ready for unloading at the agreed destination.
- DDP - Delivered Duty Paid
(Delivered Duty Paid). The seller (exporter) is responsible for all costs related to delivering the goods (not unloaded) to the named destination, handling customs procedures in the importing country, and paying import duties. Under DDP, the seller provides full “door-to-door” delivery including import clearance. Risk is transferred when goods are delivered to the buyer, usually at their premises. A DDP transaction will read “DDP [place of destination]”.
Incoterms specific to maritime and inland waterway transport (four in total):
- FAS - Free Alongside Ship
(Free Alongside Ship). The seller (exporter) must deliver the goods alongside the vessel and clear them for export. When the goods are placed alongside the ship at the port of export, risk transfers from seller to buyer. The buyer is responsible for loading the goods onto the vessel and paying transport costs to the final destination.
- FOB - Free On Board
(Free On Board). The seller delivers the goods from their factory and loads them onto the vessel at the port of export, and handles export customs clearance. Once the goods pass the “ship’s rail”, risk transfers to the buyer. The buyer then covers transport, insurance, and import customs. An FOB transaction is written as “FOB [port of export]”, e.g. “FOB Algiers”.
- CFR - Cost and Freight
(Cost & Freight). The seller clears the goods for export, delivers them on board the vessel, and pays international freight. Risk transfers to the buyer once the goods are on board. The buyer must insure, unload, clear customs, and pay for onward transport to the final destination.
- CIF - Cost, Insurance and Freight
(Cost, Insurance & Freight). The seller delivers the goods on board, clears them for export, and provides insurance for the buyer’s benefit. Risk transfers once the goods are on board. If damaged or stolen during transport, the buyer must file a claim based on the insurance arranged by the seller. The buyer clears customs and covers transport and insurance in the importing country. A CIF transaction reads “CIF [port of destination]”.