"Incoterms" is the short and fast way of saying International Commercial Terms. First published in 1936, they are a set of 11 rules that define who is responsible for what in international transactions. The latest version is INCOTERMS 2020 and applies from 1 January 2020.
Why are they so important?
Incoterms are internationally recognized rules that describe who is responsible for the goods during transport and for how long. By referring to these rules, sellers and buyers can avoid unnecessary misunderstandings. Incoterms are recognized by authorities and courts worldwide.
Goods are transported between buyer and seller and it is necessary to determine who bears the risk for the goods and who will arrange and pay for the transport. This has implications for which of the parties should leave the task to a carrier or a forwarder. In international trade, Incoterms reduce the risk of misunderstandings, which can lead to future legal problems and unnecessary costs. The delivery condition specified in the purchase agreement determines who must pay for the insurance of the goods during transport, when the risk for the goods passes from the seller to the buyer, etc.
In order to avoid any misunderstandings, it is recommended that the terms of delivery be specified with a 3-digit code or full text in English indicating the place (and place) followed by Incoterms 2020.
Delivery terms and Incoterms state:
Who will pay transport, insurance and other costs.
From or to which place the transport is to take place.
If loading and unloading are included.
When the risk passes from the seller to the buyer.
What do they cover?
Incoterms specify all responsibilities, risks and costs involved in the transport of goods from seller to buyer.
The 3 most common international delivery terms (INCOTERMS):
1. EXW – Ex-Works (available at seller's warehouse)
At EXW, Ex-Works, the goods are available at the seller's warehouse. Here, the buyer is responsible for all costs and risks during the transport process. The seller's only task is to ensure that the buyer gets access to the goods. Once the buyer has access to the goods, responsibility passes to him, which includes loading them. EXW can be used for all modes of transport. The risk passes from the seller to the buyer at the seller's warehouse, office or where the goods are picked up.
Insurance recommendation: The buyer needs insurance for the entire transport from the time the goods are placed by the seller at the specified time and place according to the purchase agreement.
2. DAP – Delivered At Place (delivered at specified location)
With DAP, Delivered At Place, the seller bears the costs and risk of transporting the goods to an agreed address. The goods are considered delivered when they reach this address and are ready to be unloaded. The export and import responsibility is the same as for DAT (delivered at the specified terminal). DAP can be used for all modes of transport. The risk passes from the seller to the buyer when the goods are ready to be unloaded at the agreed address.
Insurance recommendation: Insurance is taken out by the seller for the agreed destination.
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3. DDP – Delivered Duty Paid (delivered duty paid, at specified location)
With DDP, Delivered Duty Paid, the seller is responsible for all costs and the risk of transporting the goods to the agreed address. This means that the seller is responsible for ensuring that the goods are ready to be unloaded, meet export and import requirements and pay any fees. DDP can be used for all modes of transport. The risk passes from the seller to the buyer when the goods are ready to be unloaded at the agreed address.
Insurance recommendation: Insurance should be taken out by the seller for the agreed destination.
Other delivery conditions
CPT – Carriage Paid To (carriage paid to) (with specified location)
In the case of CPT, Carriage Paid To, the seller is responsible for arranging export and shipping to the specified destination. However, it is the buyer who bears the risk from the moment the goods are delivered to the first carrier or terminal. CPT can be used for all modes of transport. The risk passes from the seller to the buyer when the buyer's first carrier receives the goods. Insurance recommendation: The buyer should obtain insurance for the transport. The seller should have insurance up to the place of delivery specified in the purchase agreement.
FCA – Free Carrier (with the carrier) (with specified location)
With FCA, Free Carrier, it is the seller's responsibility to deliver the goods to the carrier contracted by the buyer at an agreed time and place. This must be clearly specified in the purchase agreement. The seller must also ensure that the goods are cleared for export. FCA can be used for all modes of transport. The risk passes from the seller to the buyer when the buyer's first carrier receives the goods. Insurance recommendation: The buyer should have insurance for the transport. The seller should have insurance up to the place of delivery specified in the purchase agreement.
DPU – Delivered on site without unloading (ex DAT):
In the case of DPU, Delivered on site without unloading, it is the seller who is responsible for the costs and risk of transporting the goods to the agreed unloading location. The drop-off location can be anywhere and does not necessarily have to be covered by the insurance. The seller takes care of customs clearance and unloads the goods at the unloading point. Buyer is responsible for import clearance and all related customs fees. DPU can be used for all modes of transport. The risk passes from the seller to the buyer when the goods are unloaded at the agreed location. Insurance recommendation: Insurance should be taken out by the seller until the goods are unloaded at the specified location.
CIP – Carriage And Insurance Paid To (carriage and insurance paid to specified location)
In the case of CIP, Carriage And Insurance Paid To, the seller is responsible for all costs, including insurance and shipping, up to the specified destination. The seller is responsible for arranging insurance that at least meets the condition Institute Cargo Clauses (A) up to the specified destination on behalf of the buyer. CIP can be used for all modes of transport. The risk passes from the seller to the buyer when the goods have been delivered to the first carrier at the agreed place according to the purchase agreement.
Delivery terms for import and export
Delivery conditions for import and export are crucial to clarify the division of responsibilities and understand which costs and risks rest on the seller and the buyer during the transport process. These conditions regulate, among other things, who is responsible for arranging and paying for shipping, insurance, customs and other necessary formalities.
To facilitate international trade, the International Chamber of Commerce (ICC) has developed Incoterms, a standardized set of rules that define different delivery terms. These Incoterms terms, such as EXW, FOB, CIF, and DDP, clearly specify which tasks and costs are the responsibility of the seller and the buyer at different stages of the transport.
When exporting, it is common for the seller to be responsible for delivering the goods to a specified location, for example the seller's factory or a carrier. From this moment on, the buyer assumes responsibility and costs for the transport and any insurance. On the other hand, in the case of import, it is common for the seller to take responsibility for delivering the goods to an agreed destination within the buyer's country.
Furthermore, the terms of delivery specify when responsibility for the goods passes from the seller to the buyer. It can happen at different times depending on which delivery terms are used. For example, with the term "FOB - Free On Board", responsibility passes to the buyer when the goods are loaded on board the ship at the port of departure, while with "CIF - Cost, Insurance and Freight", it happens when the goods reach the port of destination.
In order to avoid misunderstandings and disputes, it is crucial that the parties to the deal clearly specify which delivery terms are to be used in their agreement. It is also important to note that the terms of delivery not only affect the allocation of responsibility but can also have tax and insurance implications. Therefore, it is recommended that the parties carefully consider and understand the various Incoterms before conducting international transactions.
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