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Shipping Incoterms Explained

Shipping Incoterms Explained

July 11, 2017

Incoterms were developed by the International Chamber of Commerce and are internationally accepted commercial terms used both in domestic and international trade contracts. They define the roles of the buyer and seller and are used in conjunction with existing sales agreements and other transacting methods. Incoterms rules are contractually binding and are generally recognized by legal authorities, agencies and governments across the world. Where specific terms are agreed to in a commercial contract, such terms override the terms linked to an Incoterm.

Incoterms are primarily used by the buyer and seller of goods as well as those providing associated services such as freight forwarders and carriers, lawyers and financial institutions.

Incoterms consist of a series of three letter abbreviations for common terms of trade. There are 11

Incoterms divided into two categories.

  • Clauses for all types of transport:
    • • EXW – Ex Works – The seller has the goods available at its premises. The buyer pays all transportation costs and carries all the risks for bringing the goods to their destination. The seller does not load the goods on collecting vehicles and does not clear them if they are going to be exported.
    • FCA – Free Carrier – The seller clears the goods if they are for export and pays for transportation to a carrier (named by the buyer). All further risks pass to the buyer at this point when the goods are handed over.
    • CPT – Carriage Paid To – The seller pays for carriage to an appointed carrier. Risks transfer to the buyer upon the handing over of the goods.
    • CIP – Carriage and Insurance Paid To – Seller pays for carriage and insurance to a named destination point. Risk passes when the goods are handed over to the carrier.
    • DAT – Delivered at Terminal – Seller pays for transportation to the terminal, but not for import clearance. Seller assumes all risks up to offloading at the terminal.
    • DAP – Delivered at Place – Seller pays for transportation to a place designated by the buyer. The seller does not pay for costs relating to import clearance but carries all risks prior to the point that the goods are ready for unloading by the buyer.
    • DDP – Delivered Duty Paid – The seller is responsible for delivering the goods to the named place in the country of the buyer. All costs including import duties and taxes are paid by the seller. This term places the maximum obligation on the seller and minimum on the buyer.
  • Clauses for Sea and Inland Waterway Transport:
    • • FAS – Free Alongside Ship – The seller must deliver the goods alongside the ship at a port named by the buyer. The seller must clear the goods for export. Suitable only for maritime transport and not for multimodal sea transport in containers. This term is most commonly used for heavy-lift or bulk cargo.
    • FOB – Free on Board – The seller must load the goods onto a vessel as nominated by the buyer. Costs and risks are divided once the goods are on board the vessel. The seller must clear the goods for export. This term is applicable for maritime as well as inland waterway transport only and not for multimodal sea transport in containers.
    • CFR – Cost and Freight – The seller must pay all costs to bring the goods to the port of destination. Risk is then transferred to the buyer once the goods are loaded onto the vessel. Maritime transport only and insurance for the goods is not included. This term was formally known as CNF. (C&F
    • CIF – Cost Insurance and Freight – Exactly the same as CFR except that the seller must in this case procure and pay for the insurance. Maritime transport only.

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