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Incoterms, the rules that codify international trade

When a company decides either to export or to import goods it must agree with the other party how the product will be delivered. Who will bear the transportation costs? Who will pay customs tariffs? Who will be responsible if damages occur during delivery? Incoterms are rules agreed to beforehand by the international community to avoid misunderstandings. 

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Published by ConnectAmericas

Black’s Law Dictionary explains that Incoterms are “standardized shipping terms defined by the International Chamber of Commerce (ICC) that apportion the costs and liabilities of international shipping between buyers and sellers.” 

Although they do not constitute an international norm as such, CCI’s website explains that, “they have been incorporated in contracts for the sale of goods worldwide and provide rules and guidance to importers, exporters, lawyers, transporters, insurers and students of international trade.” 

CCI’s latest revision of the terms in 2010 established eleven different rules, seven of which are general and suited for all types of transportation. The other four specifically apply to sea or inland waterway transport, as follows:

“E” Rules: delivery at the seller’s premises

1. EXW (“Ex Works”)

If the agreement between parties provides that the goods will be delivered EXW, the goods will be delivered at the seller’s factory or wherever the seller determines (e.g., a warehouse.) In this case, the seller is not responsible for transportations costs, customs tariffs or for loading the goods on to the transport vehicle.

“F” Rules: delivery at place agreed to in the seller’s country

2. FCA (“Free Carrier At”) 

If the parties agree that the goods will be delivered under the term FCA, the seller must deliver the goods to the carrier or to any other person designated by the buyer at a place established in the agreement, which is usually the international shipping point. This means that the seller will be responsible for all transport costs and risks until the goods are delivered, in addition to bearing customs fees at the shipping point.

3. FAS (“Free Alongside Ship”)

The FAS rule is one of four applying exclusively to sea and inland waterway transport. Hence, the seller delivers the goods at the named port of shipment alongside the vessel but does not assume the costs of carrying them on the ship. Therefore the seller is responsible for domestic transportation costs and risks until it reaches the port of shipment, in addition to customs duties. 

4. FOB (“Free On Board”)

FOB criteria are very similar to FAS with the difference that the seller must deliver the products on board the vessel, not alongside the ship. Again, the seller must assume domestic transport costs and risks to the port in addition to customs duties at the port of shipment.

“C” Rules: Indirect delivery, with payment of principal transport  

5. CFR (“Cost and Freight”)

The CFR rule is also used only for sea and inland waterway transport. What happens here is that the seller covers the costs from its premises to the port of destination. That is to say, in contrast to FAS and FOB rules, here the seller assumes the ship’s delivery costs. However, the seller does not assume responsibility in the event of potential damages that may occur to the goods once they are left on the port onwards: if something does occur, the buyer will be responsible or must purchase insurance to protect them. 

6. CIF (“Cost, Insurance and Freight”)

CIF terms are very similar to CFR and are the last of the group that apply exclusively to sea and inland waterway transport. The biggest difference between CFR and CIF is that the seller agrees to take out insurance to protect the goods during their transport by ship. 

7. CPT (“Carriage Paid To”)

When there is an agreement under the CPT term, the seller has the obligation to deliver the goods to a carrier of its choice and to pay the transportation costs of the goods from its premises to the point of destination. However, the seller is released of its responsibility once the goods are delivered to the carrier and it is the seller who must take out insurance for the international transport of the goods.  

8. CIP (“Carriage and Insurance Paid To”)

Although the CIP term is similar to the CPT rule, it differs in that the seller also has to take out insurance for the international transport of the goods. However, CCI’s website clarifies that “the buyer should note that under CIP the seller is required to obtain insurance only on minimum cover. Should the buyer wish to have more insurance protection, it will need either to agree as much expressly with the seller or to make its own extra insurance arrangements.”   

Additionally, CIP differ from CIF rules in that the first applies to any type of transport while the term CIF only applies to sea and inland waterway transport. 

“D” Rules: Delivery at point of destination

9. DAT (“Delivered At Terminal”)

If the delivery of goods is carried out under DAT terms, the seller must assume responsibility for the transport of goods from its premises to the destination port or terminal stipulated in the agreement, including the unloading from the selected means of transportation. Towards these ends, the Trade Intelligence Office PROPCOMER explains that the definition of terminal includes “any place, whether covered or not, dock, warehouse or highway, railway or air terminal.” Therefore, all risks are assumed by the seller.

10. DAP (“Delivered At Place”)

If the parties agree that delivery will be carried out under the term DAP, the seller must assume responsibility for the delivery of the goods at the named place of destination – which is usually the buyer’s domicile-, this includes unloading from the means of transportation that was used. In this case, the seller is responsible for all risks until the product is delivered to the buyer.

11. DDP (“Delivered Duty Paid”)

The term DDP is equivalent to the DAP rule, except that in this case in addition to the transportation costs and risks, the seller is responsible for export and import tariffs, releasing the buyer from any tax burden applicable to the product.

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