INCOTERMS are basically terms governing contracts for the international sale of goods. These terms have a primary objective to determine the points of risk transfer and transportation costs related to international business transactions.
International terms of trade will effectively treat the conditions of sale, they define the minimum rights and obligations of the seller and buyer as freight, insurance, handling at terminals, customs clearances and obtaining documents of an international sale of goods contract. Therefore they are also called “price clauses”, because each term determines the elements that make up the price of goods. After aggregate to purchase and sale contract shall be legally binding. Reflecting the international custom in trade, in order to simplify and expedite the preparation of the terms of purchase and sale contracts.
A good knowledge of INCOTERMS is indispensable for the negotiator to include all expenses on transactions in foreign trade. Any misinterpretation of rights and obligations of the buyer and seller can cause large commercial losses per one or both parties. Thus, it is important to carefully study the most convenient term for each business operation in order to avoid incompatibility with provisions sought by dealers.
The choice of the INCOTERM during negotiations should take into consideration the financial, fiscal and structural aspects of both the seller and buyer, since both may be responsible for only certain risks and / or costs if they are fit to do so. If not, the best and safest will be to leave as much responsibility in charge of the other party involved in the contract.
The first edition of INCOTERMS was in 1936 when the ICC (International Chamber of Commerce) consolidated the various contractual forms that were being used in international trade to that point, with the aim to standardize and facilitate the interpretation of contracts. Initially INCOTERMS were only employed in sea and land transport and from 1976 in aviation.
Over the years with the advent of globalization, the original text has undergone several enhancements trying to adapt to the evolution of the negotiation process and logistics. The final published version of Incoterms is from the year 2010. This version is composed of eleven acronyms recognized worldwide by importers and exporters. They are divided into four groups in order to facilitate the understanding and the defining of each one.
Group E – Minimum requirement for the seller – Ex Works (Exit) – Goods delivered to the buyer at the seller’s establishment: Term usedfor any mode oftransportation.
The goods are placed at the disposal of the buyer at the seller’s property or place named by him (warehouse, factory, etc.). It is up to the buyer to take all measures for removal of goods from the seller’s property, inland transportation, shipment abroad, licenses, hiring international freight and insurance, etc. The buyer takes up all costs and risks involved in taking the goods from the origin to the destination. Local transfer of risks and cost is the address of the seller.
Group F – Main carriage not paid by Seller
FCA – Free Carrier (named place) / Free Carrier (named place): Term used for any mode of transportation. The seller delivers the goods cleared for export to the attention of international carrier nominated by the buyer at the named place in the country of origin. If delivery occurs at the seller, the seller is responsible for shipping. If delivery occurs at any other place, the seller is not responsible for unloading. This way the buyer is responsible for freight and international insurance. The transfer site costs and risks is the same, in this case, the location in the designated source.
FAS – Free Alongside Ship (… named port of shipment) / Free Alongside Ship (…named port of the shipment): Term used only in sea shipping. The seller is responsible for delivering the goods on the side of the carrier vessel (main vessel), already cleared for export, leaving the buyer, in turn, responsible for freight and international insurance. The location of risk transfer and cost is along the ship’s side.
FOB – Free On Board (… named port of shipment) / Free on Board (… named port of shipment): Term used only in sea shipping. The responsibility of the seller of the merchandise goes to when transposing the ship’s rail (main transport) at the port of embarkation. The seller is responsible for all shipping costs, customs clearance and intern shipping in origin. Since the signing of major international insurance and freight shall be in charge of the buyer. Local transfer of risk and cost in this case is the same, the time when the goods transposes the main walled vessel.
Group C - Main Carriage Paid
CFR – Cost and Freight (… named port of destination) / Cost and Freight (… named port of destination): Term used only in sea shipping. Seller assumes all costs prior to international shipment as well as the hiring of international carriage to transport the goods to the named port of destination. The buyer is responsible for the recruitment of international insurance. Therefore the responsibility of costs is only transferred to the buyer at the time of unloading the goods at destination port. However the responsibility for the risk is transferred at the port of origin at the time the merchandise crosses the walled main vessel.
CIF – Cost, Insurance and Freight (… named port of destination) / Cost, Insurance and Freight (… named port of destination): Term used only in sea shipping. It is similar to CFR, the only difference is that in this case the seller will also be responsible for hiring the international insurance. Points of transfer of responsibility for costs and risks on the merchandise are the same CRF; costs – the unloading of goods moment at the destination port and risks – when the goods are shipped to the main vessel.
CPT – Carriage Paid to (… named place of destination) / Carriage Paid to named place of destination): Term used for any mode of transportation. The seller is responsible for freight to transport the goods to the place indicated by the buyer at destination, may be a port, port terminal, ramp, etc. also being responsible for all costs incurred up to this point. The transfer of responsibility for costs is given in the place indicated at the time of unloading the goods. Since the transfer of responsibility for risk is made at the time that the seller delivers the cargo to the carrier still in port terminal in origin.
CIP – Carriage and Insurance Paid to (… named place of destination) / Carriage and Insurance Paid To (… named place of destination): Term used in any mode of transportation. It is similar to CPT, the only distinguishing factor is that in this case the seller is also responsible for the recruitment of international insurance. Transfer points of responsibility for costs and risks are the same mode of CPT; costs – the destination specified by the buyer; risk – delivery of the goods to the carrier at the port terminal of origin.
Group D (Delivery) – Expenses until the delivery location – Maximum obligation for the seller (exporter).
DAP – Delivered at Place (… named place of destination) / Delivered at Place (… named place of destination): This new term was introduced to replace the terms DAF, DES and DDU. With its application, the goods may be put at the disposal of the buyer (importer) at port of destination, even in the carrier ship and before clearance for import, as occurred with the term DES or, elsewhere as happened with the terms DAF, where the delivery would take on designated border and DDU, where the delivery was to be held at some place designated by the buyer himself (importer), however, in any case before the clearance the merchandise to the buyer, ready to be discharged, not dealing with formalities for import at the named destination terminal, or another agreed location, assuming the costs and risks inherent in the carriage to the place of destination (local delivery). It is a term that can be used for any mode of transportation.
DAT – Delivered at Terminal (… named place of destination) / Delivered at Terminal designated (… named place of destination): Term used for any mode of transportation. Establishes that the goods may be put at the disposal of the buyer (importer), not cleared for import at a port terminal, or optionally can also be arranged to the buyer (importer) in another terminal outside the port of destination. The seller ends their responsibility when placing the goods at the disposal of the buyer not dealing with formalities for import at the named destination terminal, assuming the costs and risks associated with transport to the port or destination terminal and the unloading of the goods. That is, the responsibility for cost and risk is only passed to the buyer when the goods are unloaded at the terminal indicated.
DDP – Delivered Duty Paid (… named place of destination) / Delivered to the buyer with the Rights Paid (… named place of destination): This term is establishing a greater degree of commitment to the seller. Seller assumes all responsibility for delivering the goods at the destination designated by the importer, may be factory, warehouse, distribution center, etc., already cleared for import. The seller assumes all risks and costs including duties, taxes and other charges upon import, transport, insurance, etc. until the moment of delivery of the goods at the final destination. It is a term that can be used for any mode of transportation. The chart below shows graphically where it starts and ends the responsibility of the buyer and seller in accordance with INCOTERMS.