What are Incoterms, and who uses them?

International Commercial Terms are the official International Chamber of Commerce (ICC)
rules that explain trade terms. They are a voluntary, authoritative, globally-accepted and
adhered-to text for determining the responsibilities of buyers and sellers for the delivery of
goods under sales contracts for domestic and international trade. Incoterms closely
correspond to the U.N. Convention on Contracts for the International Sales of Goods.
Incoterms are known and implemented by all major trading nations.

Incoterms are only part of the whole export contract. They dont say anything about the price
to be paid or the method of payment that is used in the transaction. Furthermore, Incoterms
dont deal with the transfer of ownership of the goods, breach of contract, or product liability;
all of these issues need to be considered in the contract of sale. Also, Incoterms cant override
any mandatory laws.

The Origin Of Incoterms

Differences in trading practices and legal interpretations between traders of different

countries necessitated a need for a common set of rules. These rules needed to be easy to
understand by all of the participants in order to prevent misunderstandings, disputes and
litigation. Incoterms were first created in 1936 and were designated Incoterms 1936. Since
then, Incoterms have evolved into a codified worldwide contractual standard. They are
periodically updated as events in international trade occur and require attention. Amendments
and additions were made in 1953, 1967, 1976, 1980, 2000, and 2010.

Incoterms 2010

The most current revision of the terms, Incoterms 2010, came into effect on January 1, 2011,
and consists of 11 Incoterms. The latest revision categorizes the terms by modes of transport,
and according to the export.gov website, reflect a need for improved cargo security, changes
to the Uniform Commercial Code in 2004 that resulted in a deletion of U.S. shipment and
delivery terms, and new trends in global transportation. You'll find an excellent discussion of
the Incoterms 2010 and how to use them in this three-part series of articles by Dr. Roberto
Bergami.

While you can still use previous versions of Incoterms, like Incoterms 2000, its not
preferred, and its going to be more of a hassle; if youre not using Incoterms 2010, you must
clearly state which version youre using and make sure your documentation is correct
throughout the transaction. If youre looking to streamline that tedious process, our software
can help.

Incoterms that apply to any mode of transport are:

EXW (Ex Works)

FCA (Free Carrier)

CPT (Carriage Paid To)

 CIP (Carriage and Insurance Paid To)

DAT (Delivered at Terminal)

DAP (Delivered at Place)

DDP (Delivered Duty Paid)

Incoterms that apply to sea and inland waterway transport only:

FAS (Free Alongside Ship)

FOB (Free on Board)

CFR (Cost and Freight)

CIF (Cost, Insurance, and Freight)

Do rules make life more fun? Most people would shake their heads no, as the word itself has
negative connotations. But as an exporter, you know better. Where Incoterms are concerned,
following the rules actually gives you more freedom to exportand more opportunity to
make more profit!

Here are each of the specific terms defined, via export.gov:

Incoterms that apply to any mode of transport are:

EXW (Ex Works): the seller fulfills his obligations by having the goods available for
the buyer to pick up at his premises or another named place (i.e. factory, warehouse,
etc.). Buyer bears all risk and costs starting when he picks up the products at the
sellers location until the products are delivered to his location. Seller has no
obligation to load the goods or clear them for export.

FCA (Free Carrier): the seller delivers the goods export cleared to the carrier
stipulated by the buyer or another party authorized to pick up goods at the sellers
premises or another named place. Buyer assumes all risks and costs associated with
delivery of goods to final destination including transportation after delivery to carrier
and any customs fees to import the product into a foreign country.

CPT (Carriage Paid To): seller clears the goods for export and delivers them to the
carrier or another person stipulated by the seller at a named place of shipment. Seller
is responsible for the transportation costs associated with delivering goods to the
named place of destination but is not responsible for procuring insurance.

CIP (Carriage and Insurance Paid To): seller clears the goods for export and delivers
them to the carrier or another person stipulated by the seller at a named place of
 shipment. Seller is responsible for the transportation costs associated with delivering
goods and procuring minimum insurance coverage to the named place of destination.

DAT (Delivered at Terminal): seller clears the goods for export and bears all risks and
costs associated with delivering the goods and unloading them at the terminal at the
named port or place of destination. Buyer is responsible for all costs and risks from
this point forward including clearing the goods for import at the named country of
destination.

DAP (Delivered at Place): seller clears the goods for export and bears all risks and
costs associated with delivering the goods to the named place of destination not
unloaded. Buyer is responsible for all costs and risks associated with unloading the
goods and clearing customs to import the goods into the named country of destination.

DDP (Delivered Duty Paid): seller bears all risks and costs associated with delivering
the goods to the named place of destination ready for unloading and cleared for
import.

Incoterms that apply to sea and inland waterway transport only:

FAS (Free Alongside Ship): seller clears the goods for export and delivers them when
they are placed alongside the vessel at the named port of shipment. Buyer assumes all
risks/costs for goods from this point forward.

FOB (Free on Board): seller clears the goods for export and delivers them when they
are onboard the vessel at the named port of shipment. Buyer assumes all risks/cost for
goods from this moment forward.

CFR (Cost and Freight): seller clears the goods for export and delivers them when
they are onboard the vessel at the port of shipment. Seller bears the cost of freight to
the named port of destination. Buyer assumes all risks for goods from the time goods
have been delivered on board the vessel at the port of shipment.

CIF (Cost, Insurance, and Freight): seller clears the goods for export and delivers
them when they are onboard the vessel at the port of shipment. Seller bears the cost of
freight and insurance to the named port of destination. Sellers insurance requirement
is only for minimum cover. Buyer is responsible for all costs associated with
unloading the goods at the named port of destination and clearing goods for import.
Risk passes from seller to buyer once the goods are onboard the vessel at the port of
shipment.

As you can see, each Incoterm provides exporters clear, succinct rules that help us understand
our responsibilities, clarify any gray areas in contracts, and can save us a lot of headaches
when used correctly.

Incoterms reduce the risk of legal complications by giving exporters a single home
base from which to reference trade practices.
 Incoterms help establish and execute an international transaction by defining distinct
obligations and responsibilities between buyers and sellers. When a seller and a buyer
agree to employ a particular Incoterm, each accepts the corresponding obligations and
responsibilities as clearly set forth and defined under that particular Incoterm.