What are Incoterms?
Incoterms stands for International Commercial Terms. Incoterms are a codified set of standard contractual provisions relating to the carriage of goods.
Defined since 1936 by the International Chamber of Commerce (ICC), Incoterms are revised every 10 years to reflect changes in international trade practices.
These customary rules define in a codified manner the conditions of delivery of goods under a sales contract.
More specifically, Incoterms make it possible to determine the conditions of delivery of goods sold: assumption of transport, insurance, customs formalities, duties and taxes, customs clearance obligations, transfer of risks.
How are the Incoterms presented?
The Incoterms are 11 rules, codified by three letters and divided into four families, which establish the sharing of risks, responsibilities and costs between the buyer and the seller, regardless of the mode of transport used (maritime or multimodal), the country and the sector. They are part of an international sales contract and define the obligations of the seller on one side and the buyer on the other. They apply to goods; intangible goods and services are therefore not affected.
Group “E”: The seller must make the goods available to the buyer at his own premises.
Group “F”: The seller must deliver the goods to a principal carrier appointed by the buyer. The seller does not bear the costs and risks of the main transport.
Group “C”: The seller bears the costs of the main transport to the named place in the aftermarket, but not the risk of loss or damage to the goods.
Group “D”: The seller bears all costs and risks of transporting the goods to the named place of destination.
The Incoterms 2020 reform
Coming into force on 1 January 2020, the new version, like the previous one, is made up of 11 Incoterms, still classified into two groups according to the mode of transport of the goods.
The multimodal Incoterms.
Applicable to all modes of transport, the so-called “multimodal” Incoterms can also be used when the contract covers several modes of transport, which is notably the case when goods are transported by container.
Incoterms EXW and FCA
- EXW – Ex Works
The rule which imposes the least obligations on the seller, whose sole responsibility is to pack the goods and make them available to the buyer at his own premises. Under this rule, the buyer bears all costs and risks involved in loading and transporting the goods to their destination.
As the buyer is responsible for customs formalities on export, he may encounter difficulties in the seller’s country in obtaining proof of exit of the goods.
For this reason, the ICC recommends reserving this rule for national or regional trade not involving the export of the goods and favouring the FCA rule, under which the formalities and costs of customs clearance are the responsibility of the seller.
- FCA – Free Carrier
Two options are possible for this Incoterms depending on the place of delivery:
- at the seller’s premises, where the seller loads the goods onto the buyer’s means of transport (FCA “seller’s premises”);
- at any other place: the seller arranges for the goods to be taken to the place of shipment where they are made available to the carrier ready for unloading (FCA “other named place”).
Under this rule, the buyer pays for most of the transport, but allows him to be exempted from formalities in the country of export, which are the responsibility of the seller.
Incoterms CPT and CIP
- CPT – Carriage Paid To
The seller bears the cost of transport to the destination but is no longer responsible for the goods, which travel at the buyer’s risk. This is because the transfer of risk occurs at the time of delivery, when the goods are handed over to the carrier, while the transfer of costs to the buyer takes place when the goods arrive at their destination.
- CIP – Carriage and Insurance Paid to
The seller bears the cost of transport to the destination specified by the Incoterms.
The CIP is a frequently used rule, particularly for containerised transport, which allows the routing of goods to a given point to be controlled.
As with CPT, the costs of unloading at the agreed destination are borne by the seller only if the contract of carriage so provides.
However, unlike CPT, the seller is obliged to take out insurance covering the risks associated with the transport of the goods to the place of destination.
Incoterms DAP, DPU and DDP
Under the Incoterms D rules, since delivery is made in the country of destination, the transfer of risk takes place there.
Under these so-called “Incoterms on arrival”, the goods travel at the risk of the seller who assumes all risks and costs associated with the transport of the goods to the place of destination.
- DAP – Delivered At Place
This Incoterms means that goods are considered delivered when they are made available to the buyer at destination on the arriving means of transport, without being unloaded. According to this rule, the seller is responsible for transporting the goods to the agreed delivery point in the country of destination.
Thus, unless the contract of carriage provides otherwise, the buyer is responsible for customs formalities, the payment of duties and taxes due on account of the import and the unloading of the goods at destination.
- DPU – Delivered at Place Unloaded
The DPU replaces the DAT 2010 and becomes a new rule in Incoterms 2020.
This rule means that the goods are considered to be delivered, once they have been unloaded from the means of transport and placed at the disposal of the buyer at the agreed place of destination (terminal or other).
Under this Incoterms rule, delivery and arrival at destination occur at the same point. The seller therefore bears all risks and costs associated with the transport of the goods and their unloading at the named place.
The DPU is the only Incoterms rule that obliges the seller to unload the goods at destination.
For more information on the DPU Incoterm.
- DDP – Delivered Duty Paid
Règle Incoterms qui confère le niveau maximal d’obligations au vendeur, qui assume tous les risques et frais, y compris de dédouanement, jusqu’au lieu convenu.
Ainsi, en vertu de cet Incoterms, les marchandises sont livrées dédouanées, prêtes à être déchargées au lieu de destination.
Seuls les frais d’assurance et de déchargement à destination sont à la charge de l’acheteur.
The Maritime Incoterms.
The 4 Incoterms are referred to as “maritime” because they are intended to be used when the seller places the goods on board (or in the case of FAS, in the vicinity of) a ship at a sea or inland port. It is at this location that the seller is deemed to have delivered the goods to the buyer.
In practice, the maritime Incoterms are reserved for the carriage of goods in bulk and conventional maritime transport, with containerised transport being specifically governed by the multimodal Incoterms.
Incoterms FAS and FOB
- FAS – Free Alongside Ship
The costs (and risks) are transferred to the buyer when the goods are placed alongside the ship (e.g. on a quay) at the designated shipping port.
The buyer thus bears all costs relating to the goods from the moment they are delivered (loading, sea transport and unloading of the vessel).
For more information on the FAS Incoterm.
- FOB – Free On Board
The transfer of costs (and risks) takes place as soon as the goods are loaded on board the vessel designated by the buyer at the agreed port of shipment.
Thus, unlike the FAS, the loading of the vessel is the responsibility of the seller.
Incoterms CFR and CIF
- CFR – Cost and Freight
Like the multimodal C-rules, the transfer of risks and costs is unbundled. The risks are transferred to the buyer at the port of departure when the goods are delivered on board the ship, whereas the costs are borne by the seller under the contract of carriage until the arrival of the goods at the agreed port of destination, not including discharge.
Thus, as a matter of principle, the costs of discharging the ship are borne by the buyer, as are the resulting handling charges, unless the contract of carriage provides otherwise.
For more information on the CFR Incoterm.
- CIF – Cost Insurance and Freight
The equivalent of the multimodal CIP, the maritime CIF differs from it in the level of insurance cover required, which is more limited than the all-risk cover of the CIP.
Nevertheless, the insurance must cover at least the price of the goods plus 10%.
For more information on the CIF Incoterm.
The main changes in Incoterms 2020
Bills of Lading with boarding endorsement (new option of the FCA rule)
The 2020 version has added an option for the parties to meet the requirements of the banks in the context of a documentary credit (or letter of credit).
This new option allows the seller to obtain the delivery of the transport document evidencing the loading on board. It will now be possible to agree with the buyer the delivery of a bill of lading (or any other transport document) with the indication “on board” or “receipt for shipment”.
This option has been created in order to comply with the legislation of some exporters who require documentary credit and only recognise conventional transport documents (CMR, LTA, bill of lading).
Differentiation in the level of insurance cover between the CIF and the CIP
The 2010 version required the seller to have the same minimum level of cover for both rules. The Incoterms CIP rule now imposes an “all risks” cover requirement, which increases the level of insurance and therefore the cost of the premium to the seller.
The DAT 2010 becomes the DPU 2020
This is the development with the most significant impact in terms of customs valuation.
In the Incoterms 2010 rules, the only difference between DAT and DAP was that for DAT, the seller delivered the goods once they were unloaded from the means of transport arriving at the terminal, whereas for DAP, the goods were considered to be delivered once they were made available to the buyer on the means of transport without being unloaded.
In the 2020 version, the ICC has decided to update the DAT and DAP rules twice:
- The order in which the two Incoterms appear has been reversed: DAP, where delivery takes place before the goods are unloaded at destination, now comes before the former DAT.
- The name DPU (Delivered at Place Unloaded), replaces the DAT rule (Delivered at Terminal), as the place of destination is not only a terminal.
- Inclusion of security provisions: intrinsically linked to transport requirements, a specific heading for safety and security requirements has been included in the 2020 version, together with the costs inherent to these requirements.
Sample Incoterms 2020 Decision Flowchart — Buyer’s Point of View
You are the BUYER and —
1. You wish to receive the goods directly at your place of business or other point in the country of destination, and you are unwilling to accept any transport risks. You must choose an ‘arrival’ contract (see above). Are you willing to carry out import clearance formalities?
a) If No:
Choose DDP, which gives the seller total responsibility up to delivery at the buyer’s premises or the named delivery point if the shipment is containerized or multimodal, or delivery is to be made to an inland or port terminal. But note that practical realities may prevent a seller from being able to undertake import clearance, so choose this rule with caution. See the Explanatory Note for DDP in the text of the Incoterms 2020 rules (ICC Publication No. 723E).
b) If Yes, you may use:
i) DAP which imposes upon seller total transport responsibility and risk, except as regards import clearance formalities and duties, which are for the buyer’s account. Note that DAP differs from DPU in that DAP does NOT require the seller to unload the goods at destination; or
ii) DPU, which imposes upon seller total transport responsibility and risk, except as regards import clearance formalities and duties, which are for the buyer’s account. Note that DPU requires the seller to unload the goods at destination.
If the above does not apply, go to:
2. You wish to purchase on the basis of a sale price that includes the cost of the international carriage of the goods, but you accept to bear the risks of such transport. The seller will pay export clearance formalities, whereas you will pay import clearance formalities. The costs of main (international) transport will be borne by the seller. Delivery of the goods takes place in the seller’s country. The buyer must choose a ‘C’ rule.
a) If shipment is containerized or multimodal, or delivery is to an inland or port terminal:
i) choose CPT if you do not want the seller to pay for an insurance cover;
ii) choose CIP if you do want to include insurance costs for all risks cover (LMA/IUA Clauses A or similar) in the price paid by the seller.
b) If shipment is of traditional commodities lifted onboard a ship, or you otherwise wish to divide risks once the goods are onboard the ship:
i) choose CFR if you do not want the seller to pay for an insurance cover;
ii) choose CIF if you do want to include insurance costs in the price paid by the seller. Note the seller’s insurance obligation under CIF is limited to minimum cover (LMA/IUA Clauses C or similar).
If the above does not apply, go to:
3. You accept to arrange and pay directly for the international carriage of the goods and also to bear the risks of such transport. The costs and risks of main (international) transport will be borne by the buyer. Delivery of the goods takes place in the seller’s country. Buyer must choose an ‘F’ or ‘free’ rule.
a) If you are willing to be responsible only for import customs clearance, but not for export clearance:
i) choose FCA if the goods are to travel in containers or by multimodal transport, or if delivery is to be made to an inland or port terminal. The goods are delivered to the first carrier engaged by the buyer, either at seller’s premises or at a transport terminal (any export clearance is the seller’s responsibility);
ii) choose FAS if the goods are to be delivered alongside the ship (any export clearance is the seller’s responsibility);
iii) choose FOB if the goods are general cargo or bulk commodities to be loaded directly onboard a ship or if for any other reason you wish to set the transfer of risks and divide costs once the goods are onboard the ship (any export clearance is the seller’s responsibility).
b) If you are willing to be responsible for both export and import clearance formalities, if any:
Choose EXW if the goods are to be delivered at the seller’s premises. All costs and risks are transferred from the seller to the buyer after the goods have been made available to the buyer (not cleared for export) at the seller’s premises. Note that EXW is suitable primarily for domestic trade. See possible difficulties in using EXW at the Explanatory Note in the text of the Incoterms 2020 rules (ICC Publication No. 723E).
Frequently Asked Questions
What is the most commonly used incoterm?
CFR (Cost and Freight): the seller bears the cost and freight until arrival at the named port, including export clearance. However, the risk is transferred to the buyer when the goods are loaded onto the vessel. This Incoterm is only used for sea transport.
What are the 4 families of Incoterms?
They are classified by type of transport (there are 4 maritime incoterms) and by order of increasing obligation for the seller. A distinction must be made between sale on departure and sale on arrival. The Incoterms for outbound sales are as follows: EXW, FCA, FAS, FOB, CFR, CIF, CPT and CIP.
How to easily understand Incoterms?
It is a series of three-letter terms. These terms reflect the allocation of costs (e.g. transport costs) and risks between the parties. They therefore define certain obligations, costs and risks involved in the transfer of a product.
What is the difference between DAP and DDP?
The DDP Incoterm differs from the DAP Incoterm in the settlement of customs and tax costs. Indeed, if the delivery is based on the DAP Incoterm, the transport costs are borne by the seller. However, the buyer must pay the import taxes.
Why choose FOB?
Why choose the FOB incoterm? This is a transport mode applicable only to maritime transport. It is an incoterm of sale on departure, i.e. the risks are for the buyer from the moment the goods are loaded on the ship.
What is the difference between FOB and CIF?
With the CIF Incoterm, the seller's insurance will be called upon in the event of an incident during transport. The FOB Incoterm, on the other hand, defines greater liability shares for the buyer. The buyer is responsible for the transport of the goods and for taking out marine insurance.
Why use the EXW Incoterm?
EXW also has certain advantages for the buyer: since the buyer is responsible for transport and formalities, he has full visibility of the delivery process. He can therefore better control the goods and the progress of their delivery.
When to use FCA?
It is often used by suppliers who wish to avoid delivery of goods in international transactions. FCA stands for Free Carrier Alongside.
What is the main purpose of Incoterms?
The purpose of these agreements is to regulate: the distribution of costs related to the transport of goods; the transfer of risks during the transport of goods.