The Incoterms rules or International Commercial Terms are a series of pre-defined commercial terms published by the International Chamber of Commerce (ICC) that are widely used in international, as well as national and community-based commercial transactions or procurement processes.
Its main purpose is to provide international rules to construe most used trade terms in foreign trade as regards to parties' obligations to a sale agreement for goods' delivery, apportionment of costs and risks associated with the said goods, as well as export and import formalities.
Since 1st January 2011, Incoterms 2000 has been replaced by Incoterms 2010. The main changes concern the following:
Disappearance of Incoterms DAF / DES / DEQ / DDU ;
Loss of the notion of “railing gateway”;
With the rise of terrorism, checks on the security of goods will be clarified, mainly regarding the taking over of formalities and related costs;
Creation of two new Incoterms namely DAT (Delivered At Terminal) and DAP (Delivered At Place). The former replaces DEQ and the latter is set for the terms DAF / DES / DDU.
Consequently, there are now 11 Incoterms distributed according to whether they are applicable to all means of transportation and for waterway and / or maritime transportation.
Incoterms for all means of transport
These terms can be used regardless of the means of transportation, including waterways, maritime or air transportation. They are also called "multimodal" because they combine different means of transport.
EXW or Ex-Works (named place of delivery)
The seller shall make the goods available on their premises, or at another named place, at the agreed date. The buyer must organize, pay for the transportation of the goods, and bears all transportation risks to the final destination. Moreover, all formalities, export and import costs, but also the duties and taxes related to these operations, are the responsibility of the buyer.
FCA or Free Carrier (named place of delivery)
FCA replaces FOB (Free on Board).
The seller delivers the good, cleared for export, at a named place (including the seller’s own premises). The goods can be delivered by a carrier nominated by the buyer. The transfer of risks is materialized upon delivery of the goods by the seller at the named place. Once the good has arrived at the named place, the good is considered as being delivered. The buyer is responsible for, both, unloading the goods and loading them onto their own carrier. The buyer shall also be responsible for taking care of export formalities and costs, as well as related duties and taxes. The purchaser endorses the transportation to his business place, carries out the import formalities, and pays the corresponding duties and taxes.
CPT or Carriage Paid To (named place of destination)
CPT replaces C&F (Cost and Freight) and CFR terms for all containers outside of non-containerized sea-freight.
The costs of sea transportation to the named port of destination shall be borne by the seller. The seller is responsible for origin costs including export clearance and freight costs for carriage to the named place of destination. The transfer of risk is established as soon as the goods are made available to the first carrier. Henceforth, the insurance costs are borne by the buyer.
CIP or Carriage and Insurance Paid to (named place of destination)
The conditions are quite similar to those of the CPT, except that the seller shall provide the buyer with insurance covering the risk of loss or damage of the good during transportation. CIP requires the seller to insure the goods for 110% of the contract value under at least the minimum cover of the Institute Cargo Clauses of the Institute of London Underwriters
DAT or Delivered At Terminal (named terminal at port or place of destination)
This term dethrones the term DEQ. In addition to the main transport, the seller is in charge of delivering and offloading the goods at the named terminal. All risks and related costs, until arrival of the goods at the named terminal, are borne by the seller. The terminal can be a port, an airport, or an inland freight interchange, but must be a facility with the capability to receive the shipment. Once the delivery is completed to the named terminal, all risks and subsequent charges, i.e. import duty, taxes, customs and on-carriage, are borne the buyer.
DAP or Delivered At Place (named place of destination)
This term is the major substitute for the terms DAF, DES and DDU. The seller is responsible for the delivery of the goods to the named place of destination. All costs (shipment, legal formalities for export) and risks, relating to this operation, are born by the seller. The goods are placed at the disposal of the buyer at the named place of destination without being unloaded. The buyer will therefore have to unload the goods, carry out the import formalities, as well as pay for customs duties and taxes.
DDP or Delivered Duty Paid (named place of destination)
The seller is responsible for the delivery of the goods to the named place of destination. The seller pays for all costs relating to the transportation of the goods, export and import custom clearances, as well as duties and taxes related to these operations.
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.
Incoterms for waterway and / or maritime transportation
These four (04) Incoterms are only applicable for waterway and / or maritime transportation.
FAS or Free Along Side (named port of shipment)
The seller is required to deliver goods alongside the buyer’s vessel at the named port of shipment.
FAS requires the seller to clear the goods for export. All risks and costs of loading, shipping, offloading and transporting the goods from the named port of shipment to the buyer’s business storage unit are borne by the buyer. This term should only be used for non-containerized sea freight and inland waterway transport.
FOB or Free On Board (named port of shipment)
The seller is required to deliver goods on board a vessel that is to be designated by the buyer in a manner customary at the particular port. In this case, the seller must also arrange for export clearance. The transfer of risks and expenses takes place at the time of delivery of goods on the vessel. The buyer pays cost of marine freight transportation, bill of lading fees, insurance, unloading and transportation cost from the arrival port to destination. This term should only be used for non-containerized sea freight and inland waterway transport.
CFR or Cost and Freight (named port of destination)
In addition to being responsible for all freight and loading costs, and risks, to the named port of destination, the seller also carries out export formalities and pays for the associated charges, duties, and taxes. In this case, the transfer of risks takes place when the goods are delivered inboard vessel at the embarkation port. The buyer shall bear the costs as soon as the goods arrive at the destination port, carry out import formalities, and pay for the corresponding duties and taxes. This term should only be used for non-containerized sea freight and inland waterway transport.
CIF or Cost, Insurance and Freight (named port of destination)
In addition to being responsible for the transportation, costs, and insurance to the named port of destination, the seller must pay for loading costs, carry out export formalities and pay for the associated duties and taxes. CIF requires the seller to insure the goods for 110% of their value under at least the minimum cover of the Institute Cargo Clauses of the Institute of London Underwriters. The seller must also turn over documents necessary, to obtain the goods from the carrier or to assert claim against an insurer to the buyer. The documents include (as a minimum) the invoice, the insurance policy, and the bill of lading. These three documents represent the cost, insurance, and freight of CIF. The seller's obligation ends when the documents are handed over to the buyer. The transfer of risks is effective when the goods are delivered inboard vessel at the embarkation port. The buyer shall bear the costs as soon as the goods arrive at the final port. He shall also carry out import formalities, and pay for the corresponding duties and taxes. CIF should only be used for non-containerized sea freight and inland waterway transport.
It should be noted that the Incoterms rules are a tool and not an obligation. To ensure the security of commercial relations, it is recommended to make use of the 2010 rules. They are summarized in the table below.