Incoterms Are The Language of International Shipping
Shipping contracts for any mode of transport have predefined terms, which are determined by the International Chamber of Commerce (ICC). These terms are commonly referred to as Incoterms, and create consistency for international and domestic trade.
In general, most freight forwarding customers use one of the following Incoterms:
- CIF or CFR Incoterms: Specify prices for exports from the U.S. generally include all services needed to delver your goods to the port of destination, except for port of destination charges, customs clearance charges, and local delivery.
- FOB Incoterms: In this case, the shipper covers all costs until the goods have been loads at the port of origin; the consignee bears the cost of shipping overseas
- Door-to-door service: We are happy to provide you with a quote for full door-to-door transport services between U.S. and anywhere in the world through our network of overseas agents
- FOB Incoterms: This is port-to-door shipment including all necessary services from the vessel to your warehouse or production facility
- CIF or CFR Incoterms: Similar to exporting goods, but in reverse
For a more complete defintion, visit the ICC website.
2010 Incoterms Examples
The most recent Incoterms were updated in 2010. These are common Incoterms:
- EXW (Ex Works): the seller has the goods available for the buyer to pick up at a named place (i.e. factory, warehouse, etc.) and the seller has no obligation to load the goods or clear them for export
- FCA (Free Carrier): the seller delivers the goods at a named placed cleared for export and the buyer assumes all risks and costs associated with delivery of goods to final destination including any customs fees for importing the product into the destination country
- CPT (Carriage Paid To): seller clears the goods for export and delivers them to the carrier or another person stipulated by the seller at a named place, but is not responsible for procuring insurance
- CIP (Carriage and Insurance Paid To): seller clears the goods for export and delivers them to the seller at a named place of with at least minimal insurance coverage
- DAT (Delivered at Terminal): seller clears the goods for export and bears all risks and costs associated with delivering the goods and unloading them at the terminal at the named port or destination, but the buyer must clear goods for import
- DAP (Delivered at Place): seller clears the goods for export and bears all risks and costs associated with delivering the goods to the destination, but buyer is responsible for unloading and clearing customs
- DDP (Delivered Duty Paid): seller bears all risks and costs associated with delivering the goods to the named place of destination, ready for unloading and cleared for import.
- FAS (Free Alongside Ship): seller shipping by ocean clears the goods for export and delivers them alongside the vessel at the named port
- FOB (Free on Board): seller clears the goods for export and delivers them onboard the cargo ship at the named port
- CFR (Cost and Freight): seller clears the goods for export and delivers them onboard the ship at the port of origin and bears the cost of freight to the port of destination, but the buyer assumes all risks for the goods once they are onboard
- CIF (Cost, Insurance, and Freight): seller clears the goods for export and delivers them onboard the vessel at the port of origin, bearing the cost of freight and insurance to the named port of destination
Why Do Incoterms Matter?
Incoterms help buyers, sellers, and shippers use contract terms in the same way. They are accepted by governments worldwide (except for India and South Africa to some extent) as well as legal authorities and businesses.
- Incoterms clearly define when the seller’s and the buyer’s specific responsibilities, costs, and risks begin and end when delivering goods internationally.
- Incoterms are pre-defined contract terms that make it easier to write contracts but always use the full ICC text (not just the shorthand abbreviation)
- Different modes of transportation and different cargo require different Incoterms
- Incoterms reduce friction between buyers and sellers but do not eliminate it
For example, EXW places the maximum responsibility on the shoulders of the buyer and usually represents the cost of goods without transportation or clearance for export.
FOB requires that freight be delivered on board the vessel. The seller pays to deliver the goods to the named port of destination, but is not obligated to insure them. Risk passes to the buyer once the vessel enter the port.
Do Incoterms Eliminate The Need For Attorneys?
An experienced importer-exporter or freight forwarder can produce a good contract by relying on Incoterms. But Incoterms do not cover everything you may wish to include in a contract. Incoterms are simply the most common and agreed-upon terms. There can be many relevant contingencies that are not covered by Incoterms or provisions may be omitted (for example, timeframes are not provided for unloading in a FOB contract) that lead to potential confusion and problems. So while Incoterms are used in contracts, they do not replace the need for competent legal help in writing those contracts.
- Incoterms do not govern title transfer (ownerhsip)
- Incoterms do not govern the consequences of breach of contract
- Incoterms are meaningful only if both seller and buyer accept and understand them in the same way
- When in doubt, always enlist the help of an attorney with international trade contact experience