Explanation of Incoterms
The Incoterms 2020 rules are standard sets of trading terms classified by a series of three-letter trade terms related to common contractual sales practices. The rules are intended to clearly communicate the tasks, costs, and risks associated with the transportation and delivery of goods.
Each Incoterms rule specifies:
- the obligations of each party (e.g. who is responsible for services such as transport; import and export clearance etc)
- the point in the journey where risk transfers from the seller to the buyer
By agreeing on an Incoterms rule and incorporating it into the sales contract, the buyer and seller can achieve a precise understanding of what each party is obliged to do, and where responsibility lies in event of loss, damage or other mishap.
There are 11 different terms, each of which helps users deal with different situations involving the movement of goods. Incoterms also deal with the documentation required for global trade, specifying which parties are responsible for which documents.
The definitive publication on the Incoterms 2020 rules is the ICC publication number 723, which is available from most major book sellers. This is essential reading for those with responsibility for setting a corporate policy or negotiating contracts with trading partners or service providers.
Incoterms can be divided into two main groups:
Rules for any transport mode
Rules for sea & inland waterway only
Another useful way of classifying the rules is by considering:
- Who is responsible for the main carriage – the buyer or the seller?
- If the seller is responsible for the main carriage, where does the risk pass from the seller to the buyer – before the main carriage, or after it?
This results in four groups:
- Buyer responsible for all carriage – EXW
- Buyer arranges main carriage – FAS; FOB; FCA
- Seller arranges main carriage, risk passes after main carriage – DPU; DAP; DDP
- Seller arranges main carriage, but risk passes before main carriage – CFR; CIF; CPT; CIP
Below are all eleven Incoterms and a brief description. For a visual representation of these terms, please check our Incoterms Chart.
Note: Party Terms – Shipper is the Seller of goods and Consignee is the buyer of goods.
One of the most commonly used-and misused-terms, FOB means that the shipper uses his freight forwarder to move the merchandise to the port or designated point of origin. The shipper fulfils their obligation to deliver once the goods have passed over the ship’s rail at the named port of origin. The consignee bears all costs and risk of loss/damage to the goods from that point and the term requires the shipper to clear the goods for export. The consignee’s responsibility for insurance and transportation begins at the same moment. The term FOB specifically refers to ocean or inland waterway transportation of goods.
In this transaction, the shipper fulfils their obligation to deliver when they have handed over the goods, cleared for export, into the possession of the appointed carrier by the consignee at the specified place. If no precise point is indicated by the consignee, the shipper may choose within the place or range stipulated where the carrier shall take the goods into their charge. When the shipper’s assistance is required in making the contract with the carrier (such as in rail or air transport), the shipper may act at the consignee’s risk and expense. The term carrier means any person who is contracted to undertake the performance by rail, sea, road air, inland waterway or by a combination of such modes (multimodal).
In these transactions, the consignee bears all the transportation costs and the risk of loss of goods. The shipper fulfils their obligation to deliver when the goods have been placed alongside the vessel on the quay at the named port of origin. This means that the consignee must bear all costs and risk of loss/damage to the goods from that point. The FAS term requires the consignee to clear the goods for export along with paying the terminal charges. It should not be used when the consignee cannot carry out directly or indirectly the export formalities. This term can only be used for sea or inland waterway transport.
This term formerly known as CNF (C&F) defines two distinct and separate responsibilities-one is dealing with the actual cost of merchandise “C” and the other “F” refers to the freight charges to a predetermined destination point. It is the shipper’s responsibility to get goods from their door to the port of destination. “Delivery” is accomplished at this time. It is the consignee’s responsibility to cover insurance from the port of origin or port of shipment to consignee’s door. Given that the shipper is responsible for transportation, the shipper also chooses the forwarder. This term can only be used for sea or inland waterway transport.
This arrangement similar to CFR, but instead of the consignee insuring the goods for the maritime phase of the voyage, the shipper insures the goods. The shipper contracts for insurance and pays the insurance premium. The consignee should note that under CIF the shipper is only required to obtain insurance on minimum coverage. This term also requires the shipper to clear the goods for export and the term can only be used for sea or inland waterway transport.
In CPT transactions the shipper/seller has the same obligations found with CIF, with the addition that the seller has to buy cargo insurance, naming the buyer as the insured while the goods are in transit. The shipper pays all costs involved for the carriage of the goods to the named destination. The risk of loss/damage to the goods as well as any additional costs due to events occurring after the time goods have been delivered to the carrier is transferred from the shipper to the consignee when the goods have been delivered into the custody of the carrier. If various carriers are used for the carriage to the agreed destination, the risk passes when the goods have been delivered to the first carrier. CPT term requires the shipper to clear the goods for export. This term can be used for multi modal transport.
This term is the containerized transport/multimodal equivalent of CIF (or can be used for roll on/roll off traffic). Seller pays for carriage and insurance to the named destination point, but risk passes when the goods are handed over to the first carrier. CIP relies on the carrier’s insurance, so the shipper is only required to purchase minimum coverage. When this particular agreement is in force, Freight Forwarders often act as carriers. The consignee’s insurance is effective when the goods are turned over to the Forwarder.
This term is used for any type of shipments. The shipper pays for carriage to the terminal, except for costs related to import clearance, and assumes all risks up to the point that the goods are unloaded.
DAP term is used for any type of shipments. The shipper pays for carriage to the named place, except for costs related to import clearance, and assumes all risks prior to the point that the goods are ready for unloading by the buyer.
The shipper is responsible for delivering the goods to the named place in the country of the consignee, and pays all costs in bringing the goods to the destination including import duties and taxes. The shipper 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 shipper including the payment of duty and fees, and minimum obligations on the consignee.
For more information
360 Logistics can provide expert assistance on negotiating contracts in relation to Incoterms. We also offer advice and consultation on a range of trade, regulatory and insurance matters, so for more information please contact us.
Every effort has been made to ensure the accuracy of definitions however this document should be used for reference only and is not intended as legal advice. 360 Logistics Group accepts no responsibility for errors or omissions. Users should seek specific guidance from Incoterms® 2020 available through the ICC at www.iccbo.org
Incoterms® is a registered trademark of the International Chamber of Commerce.