Common Incoterms
Many commercial agreements use Incoterms in their contracts
in order to create mutual confidence and legal certainty within the contract.
Incoterms is a trademarked term, owned by the International Chamber of
Commerce, that is used to express rules regarding the use of acronyms and what
they stand for within commercial contracts for the sale of goods worldwide. The
word represents International Commerce terms.
The first set of Incoterms was published in 1936 and the
eighth and most recent set was updated in 2010. There’s some mention of the
next set being published in 2020 but until then Incoterms 2010 will regulate
the use of acronyms in commercial contracts for the sale of goods
internationally. Incoterms have become essential for creating legal certainty
within commercial contracts as it provides rules and guidance for importers,
exporters, lawyers, transporters, and insurers.
What are the Incoterms rules?
Incoterms are a series of three-letter acronyms that are
related to common practices in commercial contracts – they are meant to clearly
define each parties’ tasks, costs, and risks associated with the transaction
and delivery of the purchased goods. The Incoterm will inform the contract and
those who are a party to it, but it does not constitute any governing laws.
Incoterms rules are divided into two categories that are based on whether the
method of transportation is by sea/waterway or not.
What are the benefits of using Incoterms?
The biggest benefits that come from using Incoterms are that
they provide legal certainty and mutual confidence by setting out who bares the
risk for the transaction at any given point throughout the process. By using
mutually agreed upon acronyms that define pertinent aspects of the agreement, much
of the confusion that can typically come with cross-border transactions can be
eliminated. Different countries can have very different trading practices,
therefore by using internationally certified terms, buyers and sellers can be
sure of all contract details. Incoterms provide buyers and sellers with a
uniform language and the certainty that comes along with that. The ICC also
issues official publications and can provide training on the Incoterms rules;
this also helps to reduce any possible confusion. While the Incoterms don’t
constitute any laws, they are generally accepted worldwide in the
interpretation of international trade’s most commonly used terms. Incoterms can
also increase the speed of negotiation through the use of effective and efficient
shorthand.
The 11 Incoterms
Incoterms 2010 include 11 Incoterms that range from least
onerous for the seller to most:
1. EXW: Ex Works – goods are available for pick up
at the location that the seller has specified in the contract, which is
generally the sellers’ premises.
2. FCA: Free Carrier – the seller delivers the good
to the carrier at the location agreed upon in the contract
3. FAS: Free Alongside Ship* – the shipment is
delivered when the good are cleared for export and placed alongside the ship at
the terminal named in the contract.
4. FOB: Free on Board* – goods are delivered the
moment they pass the ship’s rail; this term is only used for ocean shipments
where passing the ship’s rail is an important factor.
5. CFR: Cost and Freight* –goods are delivered when
the goods pass the ship’s rail in the shipping port and the seller must pay for
the freight to be transported to its destination but the risk of transport
falls on the buyer.
6. CIF: Cost, Insurance and Freight* – goods are
delivered when they pass the ship’s rail in the shipping port; the seller must
pay for the freight to be transported to its destination, obtain marine
insurance, and the risk of transport falls on the seller.
7. CPT: Carriage Paid To – the seller chooses the
carrier that transports the goods and must pay the cost to transport the goods
to the destination named in the contract, after which point the buyer bares all
risks and costs associated with the transaction.
8. CIP: Carriage and Insurance Paid To – the seller
chooses and pays the carrier that transports the goods to the destination named
in the contract and must insure the goods up until that point, after which
point the buyer bares all risks and costs associated with the transaction.
9. DAT: Delivered at Frontier – goods are delivered
when they are on board at the destination but not unloaded, goods must have
been cleared for export at this point but not yet cleared for import and are to
be picked up at the frontier before the customs border.
10. DAP: Delivery at Place – goods are delivered by
the seller to the buyer’s premises, or a place nearby, buyer pays the cost of
import clearance customs.
11. DDP: Delivery Duty Paid – goods are delivered by the seller to the
buyer’s premises, or a place nearby, and all costs and risks are on the seller.
*only applicable to transport by waterway.
At any time, the ICC website will have an updated list of
Incoterms – Incoterms 2010
is the most recent and updated list of Incoterms.
Terms Defined under Incoterms 2010
In addition to creating three-letter acronyms that express
different parts of the agreement, Incoterms also defines common shipping terms
to ensure further clarity within the commercial contracts. Seven of the more
common terms are defined as follows:
• Delivery
is when the risk of loss or damage is transferred to the buyer from the seller,
• Arrival refers
to the point named in the Incoterm to which carriage has been paid,
• Free
means that the seller has an obligation to deliver the goods to an agreed upon
place in order to transfer them to a carrier,
• Carrier
is anyone undertakes to transport goods from the seller to the buyer,
• Freight
Forwarder is a firm that makes shipping arrangements for either the buyer
or the seller,
• Terminal
refers to a place, and
• To clear
for export means to file for a Shipper’s Export Permit and retain an export
permit for the goods.