A brief guide to Incoterms®

The Incoterms® rules are the world’s essential terms of trade for the sale of goods.  Whether you are filing a purchase order, packaging and labelling a shipment for freight transport, or preparing a certificate of origin at a port, the Incoterms® rules are there to guide you.

 The four Incoterms® groups

There are four groups of Incoterms®; E, F, C and D. These categories are determined by the delivery locations and who is responsible for covering the cost of each part of the journey.  The groups are then split into sub-categories which refer to various scenarios.

There are eleven Incoterms® in total, each consisting of a three-digit code.  Seven of these are applicable terms for transportation via any mode of transport and the other four are specific to trade conducted by sea and inland waterways.

General Incoterms® 

EXW (Ex Works)

FCA (Free Carrier)

CPT (Carriage Paid To)

CIP (Carriage and Insurance Paid)

DPU (Delivered at Place Unloaded)

DAP (Delivered at Place)

DDP (Delivered Duty Paid)

 Specific Incoterms® applicable to sea and inland waterways

FAS (Free Alongside Ship)

FOB (Free On Board)

CFR (Cost and Freight)

CIF (Cost, Insurance and Freight)

Incoterms® clarify responsibilities of parties to a sales transaction

 For example, in each Incoterms® rule, a statement is provided as to seller’s responsibility to provide the goods and commercial invoice in conformity with the contract of sale.  Likewise, a corresponding statement is provided which stipulates that the buyer pays the price of goods as provided in the contract of sale.

 Each Incoterms® rule has a statement stipulating which party is responsible for obtaining any export license or other official authorization required for export and for carrying out the customs formalities necessary for the export to proceed.  Similarly, each rule has a corresponding statement as to which party is responsible for obtaining any import license or other official authorization required for import and for carrying out the customs formalities required for the import of goods. These statements also specify which party bears the cost of handling these tasks.

 Similarly, each Incoterms® rule specifies which party to the transaction, if any, is obligated to contract for the carriage of the goods.  Another point addressed in each I Incoterms® rule is which party, if any, is obligated, to provide for cargo insurance coverage.  These statements also specify which party bears the cost of handling these tasks.  Each rule also contains statements, among others, as to which party is responsible for packing the goods for transport overseas and for bearing the costs of any pre-shipment inspections.  

A final example is cargo delivery.  Each Incoterms® rule specifies the seller’s obligations for cargo delivery and clarifies when delivery takes place.  Each rule also specifies when the risk of loss or damage to the goods being exported pass from the seller to the buyer by reference to the delivery provision.  

 Considerations when using Incoterms®

The terms of trade will not determine the point at which title for the goods changes.  At the same time, most costs associated with international transactions are covered by the Incoterms® except VAT.  It is important to separately specify whether import VAT will be the responsibility of the buyer or seller.  In so doing, the ability to recover that VAT in the course of the importer’s business activities is a key consideration. 

Additionally, the insurance provided as part of CPT, CIP and CIF offer a minimal amount of coverage.  From a commercial perspective, it’s unlikely the insurance offered is sufficient to cover the cost of the goods.