The “Incoterms” or “International Commercial Terms” is defined as precise commercial terms, that have universal meaning for the sale of goods, published by the International Chamber of Commerce (ICC) in line with international commercial law. You can learn about the Incoterms rules by reading the detailed version of Incoterms rules for 2021. Incoterms 2021 has 11 Terms: 7 for any mode of transportation and 4 for specific to sea and inland waterway transport.
What are “Incoterms” and the Purpose?
The “Incoterms” or “International Commercial Terms” is defined as precise commercial terms, that have universal meaning for the sale of goods, published by the International Chamber of Commerce (ICC) in line with international commercial law.
The Incoterms guide traders practicing import and export worldwide. the Incoterms have guidance through every step such as creating a purchase order, packaging and labelling or preparing a certificate of origin at a port etc.
The Incoterms rules are recognized by many governments, legal authorities, and traders for international trade. Apart from national trade rules, Incoterms are universal and provide clarity and standardization, aiming to reduce uncertainties in the implementation of the rules in different countries.
“Incoterms” is a registered trademark of the ICC and the first edition is published in 1936. The Incoterms rules’ latest version Incoterms 2021 published on September 10, 2019, after the 2010 edition.
Incoterms 2021 is available on ICC’s new e-commerce platform ICC Knowledge 2 Go in both print and digital formats and available in more than 29 languages. Check with the ICC local representative in your country for further implementation guidance.
Rules and Definitions of Incoterms
Incoterms 2021 has 11 Terms: 7 for any mode of transportation and 4 for specific to sea and inland waterway transport.
Rules for Any Mode of Transportation
- EXW – Ex Works
This term has the maximum obligation and risk for the buyer and minimum for the seller.
The seller prepares the goods at the place where the goods will be loaded and then from that point, the buyer bears all of the costs and responsibilities of bringing the goods to the final destination. Seller is not obligated for loading or customs clearance.
The buyer loads the goods, handles customs clearance, transports them to desired country, and handles customs clearance in that country aswell and transports them to the unloading place. The customs, transportation, shipment, loading, unloading duties and their expenses in both countries belong to the buyer.
- FCA – Free Carrier
For sellers, FCA is the least risky form of transportation after Ex Works.
The seller delivers the goods to the bearer or another person assigned by the buyer at the specified delivery place. The seller is responsible for delivery to the stated port and export clearance of goods and seller’s responsibility ends there. Risk transfers to the buyer once the goods are delivered to the named port. The buyer bears the costs and risks from loading on board to unloading, including insurance from that point.
- CPT – Carriage Paid to
In CPT, seller clears the goods for export and delivers them to the bearer or the person assigned by the seller at the specified place of shipment. Seller is responsible for the transportation costs, export clearance process and costs and freight costs about delivering the goods to the place of destination.
Then at that point, the risk and obligations about the goods transfers to the buyer. However, seller is not responsible for procuring insurance, if the buyer needs the seller to make an insurance, the CIP term should be considered instead.
- CIP – Carriage and Insurance Paid to
Whereas seller has the same responsibilities as CPT, in addition, the seller is required to cover an insurance to against the risk of loss or damage to the goods during the transportation.
In Incoterms 2021 rules, the seller is now responsible for purchasing a higher level of insurance coverage that at least 110% of the value of the goods as detailed in Clause A of the Institute Cargo Clauses. Where the Incoterms 2021’s the minimum ratio was the Institute Cargo Clauses C.
The buyer should keep in mind that, under CIP rules, the seller is only needed to make the insurance on the minimum level. Also, the policy should be in the same currency as the contract.
- DAP – Delivered at Place
Seller clears the goods for export and takes all risks and costs about delivering the goods to the stated point of destination but not responsible of unloading.
From now on, the risk passes from seller to buyer. The buyer is responsible for all costs and risks about unloading the goods. Further, once the goods are arrived to the country of destination, the importing customs clearance needs to be completed by the buyer, including all customs duties and taxes.
DAP replaces the previous Incoterms DAF, DES, and DDU.
- DPU – Delivered at Place Unloaded
This is the only term that obligates the seller with unloading the goods. Same as DAP, seller clears the goods for export and has all risks and costs about delivering the goods to the stated point of destination and additionally bears unloading the goods at the place.
After unloading, from this point forward, the buyer is responsible with all costs and risks including custom clearance at the country of destination.
DPU replaces the former Incoterm DAT.
- DDP – Delivered Duty Paid
DDP term further from DPU, means the seller is responsible for delivering the goods to the final destination in the buyer’s country, and pays all costs including import duties and taxes. The seller is only not responsible for unloading the goods at the final destination.
This term places the maximum obligations on the seller and minimum obligations on the buyer. No risk or responsibility is transferred to the buyer until delivery of the goods at the named place of destination. Therefore, DDP is a risky term for the seller, both in terms of the import clearance procedures or delays and unexpected costs.
Rules for Sea and Inland Waterway Transport
The four rules defined by Incoterms for international trade where transportation is entirely conducted by water.
- FAS – Free Alongside Ship
The seller brings the goods to the stated port of shipment, clears the goods and delivers them alongside the buyer’s vessel inside the port and seller’s responsibility ends there.
From that moment, the buyer has to bear all costs and risks of loss or damage to the goods and responsibility of custom clearance.
- FOB – Free on Board
The seller delivers the goods on board the vessel stated by the buyer at the named port of shipment. The risk of loss of or damage to the goods passes to the buyer when the goods are on board the vessel, and from that moment buyer also takes on responsibility for all costs of the shipment.
Thus, in FOB contract, seller is required to deliver goods on board a vessel that selected by the buyer at the particular port and also obligated to arrange the export clearance of goods.
- CFR – Cost and Freight
The seller delivers the goods on board to the stated vessel and bears the cost of freight to the named port of destination. Even though the seller is responsible from the costs till the shipment to the port of destination, the risk transfers to the buyer when the goods are loaded on the vessel.
Shipment and customs clearance in the import country is on the responsibility of the buyer. The seller is not responsible for insurance or delivery to the final destination from the port. If the buyer requires the seller to cover an insurance, the term CIF should be considered.
- CIF – Cost, Insurance & Freight (named port of destination).
This term has the similar obligations of the CFR term, with the exception that the seller is required to cover an insurance for the goods against the risk of loss or damage during the transit. The seller is required to purchase the minimum level of insurance (%110) of the goods. The policy should be in the same currency as the contract.
The seller must also deliver the required documents, including the insurance policy, the invoice, and the lading bill. The seller’s responsibility ends there as the documents are delivered to the buyer.
To sum up the responsibilities of both the buyer and the seller, please see the chart below that illustrates the situation for every type of Incoterms:
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