Understanding Incoterms®

Reducing Export Risk

Never has there been a time when Incoterms have played a significant role in how goods are sold and transported.  Brexit has made these fashionable again and an essential part of the export process to ensure businesses understand the risk and liabilities involved to select the best shipping methods.  

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

All Incoterms are based on the principle that the risk of loss or damage is transferred from the seller to the buyer when the seller has fulfilled the delivery obligation according to the applicable term.  It is important to note that this  point can be different to the point at which the seller is responsible for paying the carriage to.

Why Agreeing Incoterms® Is Important

Obligation

A clear understanding as to who is responsible for what part of the process. 

  • Who organises transport and insurance
  • Who obtains shipping documents and export/import licenses

Risk

Where and when the seller ‘delivers’ the goods

  • Where risk transfers from seller to buyer

Cost

Which party is responsible for costs such as transport, packaging, loading and unloading

Buyers Responsibilities

Transfer of Risk

Sellers Responsibilities

What Do The Incoterms Mean

Ex Works
EXW

Ex Works (EXW) is the Incoterms® 2020 rule used to describe the delivery of goods by the seller at their place of business, normally in their factory, offices or warehouse. The seller does not need to then load items onto a truck or ship, and the remainder of the shipment is the responsibility of the buyer (e.g. overseas shipment and customs duty). EXW is therefore more favourable to the seller as they do not need to worry about the freight once it has left their premises 

Free Carrier
FCA

The FCA (Free Carrier) rule requires the seller to deliver the goods to the buyer or its carrier either at the seller’s premises loaded onto the collecting vehicle or delivered to another premises (typically a forwarder’s warehouse, airport or container terminal) not unloaded from the seller’s vehicle. The seller must carry out any export formalities and the buyer carries out any import formalities.

Carriage Paid To
CPT

The CPT (Carriage Paid To) rule requires the seller to deliver the goods to its carrier but does not indicate whether that is either at the seller’s premises loaded onto the collecting vehicle or delivered to another premises not unloaded from the seller’s vehicle. The seller must carry out any export formalities and the buyer carries out any import formalities. It is the seller’s responsibility to contract for carriage and of course the cost of that will be built into the selling price.

Carriage and Insurance
Paid To
CIP

The CIP rule is similar to CPT with one very important difference. This rule requires the seller to take out maximum insurance cover under Institute Cargo Clauses (A) or (Air) or similar, for the buyer’s risk. The seller must give the buyer any insurance document the buyer will need in case it must claim under that insurance.

Delivered at Place
DAP

DAP requires the seller to deliver to a place named by a buyer, typically the buyer’s premises. The buyer is responsible for unloading the means of transport. The seller has to carry out any export formalities and the buyer has to carry out any import formalities. Like with CPT and CIP the seller contracts for carriage and risk transfers only upon delivery which now is at the buyer’s premises. The seller has no obligation to the buyer to insure for its risk.

Delivered at Place Unloaded
DPU

This is a new rule for 2020. While it is often stated as simply being a change of name from the previous DAT (Delivered At Terminal) it is in fact just that little bit more. DAT itself was introduced 2010 as an expansion of DEQ (Delivered Ex Quay) to cover any mode of transport. The implication in DAT was that the seller delivered the goods, unloaded, into a terminal whether that be an open area of land such as a container yard or a covered warehouse such as at an airport.

Duty Delivered Paid
DDP

DDP functions much like DAP with one most important exception. It is the seller’s obligation to import clear the goods in the buyer’s country and pay any duties and VAT. This rule should be used with great care as the seller might need to be a registered entity both for import and VAT in the buyer’s country, a fairly unlikely scenario. If the seller finds itself unable to be the importer or to be able to recover any VAT paid then the parties should instead contract on DAP terms.

Free Alongside Ship FAS

The FAS (Free Alongside Ship) rule goes back to the days of sailing ships, and requires the seller to place the goods alongside the vessel nominated by the buyer.

Free On Board FOB

FOB (Free on Board) is the most commonly-used trade term but in practice it is used without reference to any version of the Incoterms® rules.  In such cases it is then up to the seller and buyer to agree in their contract on what they mean when they use these 3 letters.   

For more details on Incoterms® check out the International Chamber of Commerce

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