We understand: all you want is for your goods to be transported from point A to point B.
However, the two parties that are involved in any international shipping contract – buyer and seller – each have different payment responsibilities which will alter depending on the kind of delivery taking place. You should know what you are responsible for organising and paying for, and if a cargo happens to arrive in poor shape, which party is responsible for having provided the insurance cover.
“Incoterms”, short for International Commercial Terms, are a set of 11 definitions that serve to reduce risk by determining the costs that buyers and sellers should cover during a contracted shipment, and when responsibility for a shipment passes from one party to another.
Using the right incoterms is essential for all parties involved to provide a good service to clients, and to help guarantee a smooth delivery. Make sure you understand the key terms to reduce your risks and costs.
Incoterms – what each term means
Incoterms 2010 is the current agreed set of 11 terms published by the International Chamber of Commerce. These do not constitute contract or govern law, but are used to reduce uncertainty in the responsibilities expected from buyers and sellers during freight deliveries. They are commonly used in sales contracts worldwide, and should be considered before any delivery is agreed to or takes place.
Incoterms are accepted and understood by governments and authorities across the world. They identify which party is responsible for the cargo at each stage of a delivery, and dictate how the goods should be delivered, who needs to pay what, and who is responsible for the stages of the delivery such as loading and unloading.
For ease, we have divided them into terms that refer to deliveries taking place on sea and inland waterway, and those which can apply to any mode of transport.
Rules solely for sea & inland waterway
- FOB (Free On Board)
This incoterm is only used for sea transport. The seller delivers the shipment on board the vessel nominated by the buyer at the named port of shipment or procures the goods already so delivered. The risk passes from seller to buyer when the shipment is on board the vessel.”.
- FAS (Free Alongside Ship)
The seller delivers the cargo to the buyer when the goods are alongside ship – i.e. within reach of a ship’s lifting tackle. At this point, the risk passes to the buyer, who will arrange for the main carrier and pay for all insurance beyond this point.
- CFR (Cost and Freight)
The seller pays for and ensures freight delivery of the cargo, but the risk is with the buyer. Like an FOB delivery, the risk passes from seller to buyer when the shipment crosses the ship’s rail. As this incoterm demonstrates, the risk is not always with the party arranging the transport!
- CIF (Cost Insurance and Freight)
The main difference between CIF and CFR is that in CIF, the seller also pays for the insurance to cover the delivery of the goods up to the named port of destination. Due to the fact that the seller is covering the buyer’s risk during carriage, they will likely want to have the lowest-level insurance, meaning that the buyer may wish to take extra insurance out.
Rules for any mode of transport
- DAP (Delivered At Place)
The seller has responsibility for the cargo until it arrives at its final destination, and the seller is responsible for all costs including export fees, carriage, insurance and port charges at destination.
The buyer handles import fees and unloads.
- DAT (Delivered At Terminal)
The seller leaves the buyer responsible for the goods once they are unloaded at the agreed point of destination, meaning that the seller is responsible for their final unloading. The seller handles export fees, carriage, insurance, and destination port charges.
- EXW (Ex Works)
Here, the seller has the least responsibility to the cargo, and agrees to deliver it to the seller’s premises. Once the goods are at the seller’s premises, the buyer is responsible for all risks and responsibilities.
The buyer pays for the insurance, the export from the seller’s premises, and import to the destination. They also arrange all transport.
This is often a term used when initially pricing up a delivery, but is less commonly used at the final pricing.
- DDP (Delivered Duty Paid)
This is just about the opposite of EXW, as the seller has the most responsibility. They are responsible for delivering the goods to the buyer’s premises or any other place they agree to. The seller handles the cargo, pays for in export and import dues, arranges for transport, and pays for the insurance.
- FCA (Free Carrier)
Unless otherwise agreed, the seller arranges and pays for fees up to the point of delivery. The delivery point can be the seller’s premises or elsewhere. In this case, the buyer pays for the export, the import, and arranges all transport.
- CPT (Carriage Paid To)
The seller contracts and pays for the shipment to be brought to the agreed place, but passes the risk to the buyer at this point. The buyer is also responsible for insurance from this point forwards, and the risk lands with the buyer when the seller arranges for the main carriage.
- CIP (Carriage & Insurance Paid to)
This includes the responsibilities involved with CPT but, with CIP, the insurance is also paid by the seller up to the point of destination. The seller arranges insurance to cover the buyer’s risk, and pays for the main carrier to move the shipment to the destination point.
Incoterms – what you need to know
You must remember to confirm with your trade partner that you are both using the same incoterms, and that you are either using the same publications to define the terms, or that you at least agree on the same definitions.
Incoterms are an essential part of modern trade, almost serving as an international language. While the terms are not bound by law, courts and authorities across the world recognise them, making it simpler to settle legal disputes if any unfortunately arise.
As part of our service we will help you with incoterms so that you can negotiate the best deals with your suppliers. One of the best ways to ensure that you are using the right incoterms is to hire a reliable, knowledgeable, experienced freight management and haulage company for all pallet deliveries.