Incoterms are standardized terms that make it easier for buyers and sellers to understand the division of costs and responsibilities when shipping goods from one country to another.
Incoterms were created by the International Chamber of Commerce (ICC) and continue to be maintained by that organization. ICC introduced the first version of Incoterms - short for 'International Commercial Terms' - in 1936. Since then, ICC lawyers and trade practitioners have updated them six times to keep pace with the development of international trade.
Incoterms are accepted by governments, legal authorities and practitioners worldwide for the interpretation of the most commonly used terms in international trade. The scope of Incoterms is limited to matters relating to the rights and obligations of the parties in a contract of sale with respect to the delivery of goods sold.
Each Incoterm is referred to by a three-letter abbreviation. The terms are grouped in four categories, indicated by the first letter in the three-letter abbreviation.
- Under the 'E'-term (EXW), the seller only makes the goods available to the buyer at the seller's own premises. There is only one 'E' term.
- Under the 'F'-terms (FCA, FAS and FOB), the seller delivers the goods to a carrier appointed by the buyer.
- Under the 'C'-terms (CFR, CIF, CPT and CIP), the seller has to contract for carriage, but without assuming the risk of loss or damage to the goods or additional costs due to events occurring after shipment or dispatch.
- Under the 'D'-terms (DAF, DES, DEQ, DDU and DDP), the seller has to bear all costs and risks needed to bring the goods to the place of destination.
Here is a complete list of Incoterms in use at this time.
- EXW EX WORKS (named place)
- FCA FREE CARRIER (named place)
- FAS FREE ALONGSIDE SHIP (named port of shipment)
- FOB FREE ON BOARD (named port of shipment)
- CFR COST AND FREIGHT (named port of destination)
- CIF COST, INSURANCE AND FREIGHT (named port of destination)
- CPT CARRIAGE PAID TO (named place of destination)
- CIP CARRIAGE AND INSURANCE PAID TO (named place of destination)
- DAF DELIVERED AT FRONTIER (named place)
- DES DELIVERED EX SHIP (named port of destination)
- DEQ DELIVERED EX QUAY (named port of destination)
- DDU DELIVERED DUTY UNPAID (named place of destination)
- DDP DELIVERED DUTY PAID (named place of destination)
Among the best known Incoterms are EXW (Ex works), FOB (Free on Board), CIF (Cost, Insurance and Freight), DDU (Delivered Duty Unpaid), and CPT (Carriage Paid To).
EXW 'Ex Works' means that the seller delivers when he places the goods at the disposal of the buyer at the sellerís premises or another named place. The goods are not loaded for transport and they are not cleared for export. This term represents the minimum obligation on the seller.
FOB 'Free on Board' means that the seller delivers when the goods pass the shipís rail at the named port of shipment. The buyer has to bear all risk of loss or damage to the goods from that point. The seller must clear the goods for export. This term can only be used for sea or inland waterway transport.
CIF 'Cost, Insurance and Freight' means that the seller delivers when the goods pass the ship's rail at the named port of destination. The buyer has to bear all risk of loss or damage to the goods from that point. The seller must clear the goods for export. This term can only be used for sea or inland waterway transport. However the seller must purchase minimum marine insurance to cover the buyer against losses during the time of carriage.
DDU 'Delivered Duty Unpaid' means that the seller delivers the goods to the buyer not cleared from duty and not unloaded from the means of transport. The buyer bears all costs and risks from that point forward.
CPT 'Carriage Paid To' means that the seller delivers when the goods are provided to the chosen carrier and the buyer assumes all costs and risks for carriage and import into the country of destination. The seller bears the responsibility and cost for clearing goods for export.
These brief definitions will give you a flavor for the meaning of incoterms but, to be a successful trader, you must know the responsibilities these incoterms represent very well. One of the best ways to understand the incoterms and how they relate to one another is to purchase the full incoterms guide from the ICC. You can also review a pictorial display of roles and responsibilities of buyers and sellers under each incoterm at http://www.iccwbo.org/incoterms/wallchart/wallchart.pdf.