If you work with goods, you know that many unforeseen events can occur during shipment: problems with customs, damaged products, delays in delivery…
But who is responsible for the costs and liabilities when something like this happens?
To make these points clear, in the international market there are a series of rules accepted by most companies, regardless of the country in which they operate.
We are talking about Incoterms, a concept that will surely be very familiar to you if you have an import or export business.
But if not, don’t worry because in this article we explain what Incoterms are and what is the meaning of each one of them.
What are Incoterms
Incoterms (International Commercial Terms) are terms used in buying and selling operations between companies in different countries.
Its objective is to unify commercial concepts, so that the seller and the buyer understand perfectly the conditions of the operations they carry out between them.
In this way it is possible to avoid confusion, misunderstandings and costly legal proceedings.
This “universal language” of the trade sector was established by the International Chamber of Commerce (ICC) in 1936.
Since then, ICC reviews them periodically – normally every 10 years – to adapt them to changes in the industry.
What information is included in the Incoterms
There are currently eleven terms, each consisting of three letters.
As you can see, it is a very simple code. However, each Incoterm establishes the responsibilities of the buyer and seller in aspects such as:
- Transportation costs.
- Place of delivery.
- Risks.
- Insurance.
- Customs formalities.
However, there are other data that are not covered by the Incoterms, but should be well stipulated in other parts of the contract.
Some examples are:
- Description and price of the goods.
- Applicable taxes.
- Methods of payment.
- Mechanisms to resolve possible conflicts.
Types of Incoterms for export
Since the 2010 version, Incoterms have been divided into two main categories: one applicable to all modes of transport and the other to sea and inland waterways.
Below you will find the codes that make up each group and their meaning.
Incoterms for any means of transport
- EXW ( Ex Works ): the buyer has to pick up the goods directly at the seller’s premises (usually a warehouse or factory). From there, the buyer bears the costs and risks.
- FCA ( Free Carrier ): the seller delivers the goods at a point agreed with the buyer, always within the country of origin. The seller will be responsible for all the formalities and associated costs up to the collection.
- CPT ( Carriage Paid To ): the seller bears the cost of shipping to the destination country or other agreed place. But once the goods are in the hands of the carrier, the risk passes to the buyer.
- CIP ( Carriage And Insurance Paid ): similar to CPT, but the seller also pays the insurance.
- DAP ( Delivered at Place ): both parties agree on a delivery point and the seller bears all costs and risks until the buyer picks up the cargo. Import charges are not included and are paid by the buyer.
- DPU ( Delivered at Place Unloaded ): delivery, including unloading, is made at the place chosen by the buyer. It only has to pay the import clearance. All other costs are the responsibility of the seller.
- DDP ( Delivered Duty Paid ): it is the most convenient modality for the buyer, since the seller takes care of everything: transport, unloading, insurance, import…
Incoterms for maritime and inland waterway transportation
- FAS ( Free Alongside Ship ): normally used for very bulky or bulk cargoes. The seller leaves the goods at the chosen port, next to the ship that will transport them.
- FOB ( Free on Board ): this is one of the most used rules for maritime transportation. The seller transfers the goods on board the vessel, not just leaves them on the quay. Does not apply to river transportation.
- CFR ( Cost and Freight) The seller pays all transportation costs, from the time the goods are loaded on the vessel until they arrive ashore at the port of destination. However, the buyer is responsible for any damage from the time of shipment.
- CIF ( Cost Insurance and Freight ): as with CFR, the seller covers all transportation costs, but here insurance is also included.
Incoterms 2020: what’s new
The latest update of Incoterms came into force in January 2020.
The main changes with respect to the 2o10 version are:
- The DAT(Delivered at Terminal) rule becomes DPU(Delivered at Place Uploaded). Therefore, the delivery point can be anywhere, not just a terminal.
- This includes the possibility for vendors to use their own means of transportation.
- The CIF and CIP rules incorporate two different levels of insurance, each with its own conditions of contract.
- For shipments under FCA, the buyer may request a Bill of Lading (BL) with an on-board notation from the carrier as proof of delivery.
If you need advice on the application of Incoterms in your business to avoid unnecessary risks, you can contact us by filling out the form below.
