Incoterms Explained: A Comprehensive Guide to International Trade Terms

Posted on May 7, 2024 in Law & Jurisprudence

Understanding Incoterms: A Guide to International Trade

What are Incoterms?

Incoterms are a set of internationally recognized trade terms that define the responsibilities of buyers and sellers in international transactions. They clarify aspects such as delivery, risk transfer, and cost allocation.

Key Points Covered by Incoterms:

  • Delivery of goods
  • Transfer of risks
  • Distribution of costs
  • Documentary formalities

Points Not Covered by Incoterms:

  • Payment methods
  • Governing law for uncovered matters

Common Obligations in Incoterms:

Seller’s Obligations:

  • Deliver goods and documents as per the contract
  • Make goods available
  • Provide standard packaging
  • Notify the buyer
  • Cover necessary checks
  • Assume risks and expenses until the agreed point
  • Provide support for documents
  • Arrange transport (depending on the Incoterm)
  • Provide transport documents
  • Provide certificate of origin (depending on the Incoterm)
  • Obtain export licenses (depending on the Incoterm)
  • Obtain insurance (depending on the Incoterm)

Buyer’s Obligations:

  • Take delivery of goods and pay
  • Assume risks and expenses from the agreed point
  • Obtain import licenses and pay duties (depending on the Incoterm)
  • Cover additional costs if instructions are not provided
  • Cover costs of documents (depending on the Incoterm)
  • Provide shipping instructions (depending on the Incoterm)
  • Arrange transport (depending on the Incoterm)

Specifics of Each Incoterm:

Group E: Departure

  • EXW (Ex Works): Seller makes goods available at their premises; buyer assumes all responsibilities and costs.

Group F: Main Carriage Unpaid

  • FCA (Free Carrier): Seller delivers goods to the carrier or another party specified by the buyer; buyer assumes responsibility for main carriage and costs.
  • FAS (Free Alongside Ship): Seller delivers goods alongside the ship at the named port of shipment; buyer assumes responsibility for main carriage and costs.
  • FOB (Free On Board): Seller delivers goods on board the ship at the named port of shipment; buyer assumes responsibility for main carriage and costs.

Group C: Main Carriage Paid

  • CFR (Cost and Freight): Seller arranges and pays for carriage to the named port of destination; risk transfers to buyer once goods are on board the ship.
  • CIF (Cost, Insurance and Freight): Seller arranges and pays for carriage and insurance to the named port of destination; risk transfers to buyer once goods are on board the ship.
  • CPT (Carriage Paid To): Seller pays for carriage to the named destination; risk transfers to buyer upon handing goods over to the carrier.
  • CIP (Carriage and Insurance Paid To): Seller pays for carriage and insurance to the named destination; risk transfers to buyer upon handing goods over to the carrier.

Group D: Arrival

  • DAF (Delivered At Frontier): Seller delivers goods at the named frontier but before the customs border of the adjoining country; buyer assumes responsibility for import clearance and onward transport.
  • DES (Delivered Ex Ship): Seller delivers goods on board the ship at the named port of destination; buyer assumes responsibility for import clearance, duties, and onward transport.
  • DEQ (Delivered Ex Quay): Seller delivers goods on the quay at the named port of destination; buyer assumes responsibility for import clearance, duties, and onward transport.
  • DDU (Delivered Duty Unpaid): Seller delivers goods to the named destination but does not pay import duties or clear customs; buyer assumes responsibility for import clearance, duties, and any applicable taxes.
  • DDP (Delivered Duty Paid): Seller delivers goods to the named destination and bears all costs, including import duties and taxes; buyer assumes minimal responsibility.

Incoterms by Mode of Transport:

  • Any Mode: EXW, FCA, CPT, CIP, DAF, DDU, DDP
  • Sea and Inland Waterway: FAS, FOB, CFR, CIF, DES, DEQ

Additional Considerations:

  • “No Disposition” Clause: To prevent the seller from changing the destination or consignee of the goods, the buyer can include a “No Disposition” clause in the transport document.
  • Transportation Costs: Various factors can influence transportation costs, such as pre-shipment and post-shipment handling, storage, documentation, insurance, customs duties, port charges, and surcharges.
  • Contract of Carriage: This contract involves the shipper, carrier, and consignee, and outlines the terms of transporting goods.
  • Logistics: Logistics involves planning, implementing, and controlling the efficient flow of goods and materials from origin to consumption.
  • Logistics Platforms: These are designated areas for logistics activities, such as airports, ports, and distribution centers.
  • Logistics Operators: These companies provide services to optimize supply chain activities, including transportation, warehousing, and distribution.

Economic and Legal Protection of Goods:

  • Risk: The possibility of an event that could cause harm or loss.
  • Loss: The materialization of a risk.
  • Damage: The harm or loss resulting from a loss.
  • Insurance Contract: An agreement where the insurer, in exchange for a premium, agrees to compensate the insured for losses arising from specified risks.
  • Elements of Insurance Contract: Parties involved, subject matter, and terms of the agreement.
  • Rights and Obligations: The insured is obligated to pay premiums and disclose relevant information, while the insurer is obligated to pay compensation upon a covered loss.
  • Key Insurance Terms: Coverage, deductible, premium, endorsement, cancellation, reinsurance, and co-insurance.
  • Marine Insurance: Covers risks associated with maritime transport, including hull insurance, cargo insurance, freight insurance, and liability insurance.
  • Types of Losses: General average, particular average, total loss, and constructive total loss.
  • Institute Cargo Clauses: Standardized clauses used in marine insurance policies, outlining coverage and exclusions.
  • Road Transport Risks: Fire, theft, collision, and other perils associated with road transportation.
  • Claims Settlement: Procedures for reporting and documenting losses to the insurance company.

Conclusion

Understanding Incoterms and related aspects of international trade is crucial for businesses engaged in global commerce. By carefully selecting the appropriate Incoterms and implementing risk management strategies, businesses can ensure smooth transactions and protect their interests.