Incoterms® (or International Commercial Terms) are a series of commercial terms published by the International Chamber of Commerce (ICC) in an effort to aid communication between buyers and sellers. They’re a useful form of information exchange that helps to reduce confusion when discussing the terms of transactions. The first set of these emerged in 1936 and have since been amended nine times, the most recent version being ‘Incoterms 2020’ published on September 10, 2019.
So what are Incoterms®?
Incoterms® are used in international commercial transactions, and their use is encouraged by trade councils, courts and international lawyers. They are universal terms to define transactions, logistics, transportation, and all possible risks, costs, and responsibilities in easy to understand terms, which reduces the risk of legal complications and helps to facilitate global trade.
It’s vital for all parties to understand all the terms of the transaction, so having pre-defined terms that will be instantly understood by all involved can help. This is why Incoterms® are so helpful: they’re a series of 3 letter trade terms that relate to all common contractual sales practices.
For instance, when looking at the division of costs between buyer and seller, DAP (which stands for Delivered at Place) would mean that the seller was obligated to pay for loading, export customs clearance, freight and destination delivery, but not final destination import customs or unloading. DPU (which stands for Delivered at Place Unloaded) has the same breakdown of costs, except the seller is also responsible for the costs associated with unloading at the final destination.
List of Incoterms®
Here’s a full list of Incoterms® and their meanings.
Rules for any mode or modes of transport:
- EXW: Ex Works (insert named place of delivery)
- FCA: Free Carrier (insert named place of delivery)
- CPT: Carriage Paid To (insert named place of destination)
- CIP: Carriage and Insurance Paid To (insert named place of destination)
- DAP: Delivered at Place (insert named place of destination)
- DPU: Delivered at Place Unloaded (insert named place of destination)
- DDP: Delivered Duty Paid (insert named place of destination)
Rules for sea and inland waterway transport:
- FAS: Free Alongside Ship (insert named port of shipment)
- FOB: Free on Board (insert named port of shipment)
- CFR: Cost and Freight (insert named port of destination)
- CIF: Cost Insurance and Freight (insert named port of destination)
Key Terms used in Incoterms® 2020:
- Carrier: the party to whom carriage is contracted
- Customs formalities: compliance with customs regulations
- Delivery: where the risk of loss or damage to goods passes from seller to buyer
- Delivery document: document used to prove that delivery has occurred
- Electronic record or procedure: one or more electronic messages equivalent to corresponding paper document
- Packaging: in compliance with the contract or fit for transportation or stowage within a container or other means
How are Incoterms® used?
Incoterms® aren’t compulsory, and contractual agreements will contain more details than just Incoterms®. They are legally binding, however, when used in the context of a sales contract signed by the buying and selling parties.
If you are using incoterms® within a sales contract, you need to make this clear when writing the contract and ensure you’re choosing the right terms for the situation, including insurance restrictions, consideration of local laws and infrastructure, and your relationship with the customer.
Should you need any guidance and advice with regards to Incoterms® and your international shipments, contracts of sale, letters of credit and or any relevant documentation for import or export, please feel free to contact us today.