What are incoterms terms?

Since its introduction in 1936 by the International Chamber of Commerce (ICC) incoterms have been subject to revision and amendment over the past few years.

Essentially, incoterms govern the delivery aspect of goods between the buyer and seller which quite commonly concern contracts pertaining to international trade. Since they are not rules that are mandatory, in order for incoterms to have the effect in law, they must be expressly incorporated into the contract by the parties to the contract.

Since the International Trade System is constantly subject to change, amendments are brought into these incoterms every few years or so to reflect such changes.

Whichever the mode of transportation is, incoterms have been used in all international commercial agreements. Since they are a set of standardized rules and regulations, acceptance and recognition has been given to incoterms by most domestic jurisdictions and governments across the globe.

Brief history of Incoterms

Prior to the introduction of Incoterms, numerous countries practiced numerous practices when it came to international trading. And as such, the interpretations given to the law varied from country to country. This led to the obvious yet necessary call for rules and regulations that were uniform across the board. This would then inevitably resolve issues of confusion, disputes, litigation and misunderstandings between participating countries.

The conception of incoterms can be attributed to the International Chamber of Commerce (ICC) who first formulated them.

Despite the existence of incoterms boasting  ahistory of nearly 2 years, the designation of incoterms were given by the ICC in 1936 to the first ever set of incoterms that were formulated by the ICC. the evolution of incoterms is apparent as they have since been codified into contractual and  international standards.

FOB, or Free On Board was one of the first incoterms that have been in use since the year 1812. Renowned as the precursor of incoterms, FOB was recognized by the courts of britain since the year 1812.

With an expanding international commercial trade, the next incoterm commonly known as CIF (Cost Insurance Freight) came into being.

There have been approximately eight editions of incoterms that have facilitated international commercial trade.

Releasing your shipment

Incoterms 1936

The creation of the first ever set of incoterms could be attributed to this year. It consisted of a set of six incoterms as well as the method of interpretation. They are; FOB, CIF, C and F (Cost and Freight), FAS (Free Alongside Ship), Ex Ship and Ex Quay. This was an international step taken towards the standardization of incoterms into universal rules that could be utilized and materialized within the global arena.

Incoterms 1953

More revisions and standardization of incoterms came about during this year in light of World War II (WWII). With transportation of rail on the rise, in this year 3 incoterms that were non maritime were introduced.they include, Free on Truck (FOT) , Delivered Costs Paid  (DCP)  and Free on Rail (FOR).

Incoterms 1967

This revision was launched by the ICC for the purpose of correcting misinterpretations on the version of incoterms that were published previously. Also on this version, we see the addition of two incoterms; DPP (Delivery at Destination) and DAF (Delivery at Frontier).

Incoterms 1974

As Air transportation began to thrive, the need for standardized rules that governed international commercial trade on air was also on the rise. So, the introduction of the incoterm FOB Airport (Free On Board Airport) is a highlight of this revised edition. Having signified the vessel it used, the edition sought to do away with any confusion that arose between maritime FOB and FOB air travel.

Incoterms 1980

Traffic of containers began to proliferate by the 1980s, and as such freight transportation began to increase. The more stringent processes of documentation called for the need for an overhaul of incoterms. FRC (Free Carrier … named at point) and FCI were introduced with this edition (today known as  FCA & CIP), which goes to indicate goods that have been received at a point internally, or a container yard, as opposed to by the side of the ship.

Incoterms 1990

This complete revision of incoterms brought about a change in the free carrier term in specific transportation modes. FOB (Free on Board airport)  FOR (free on rail), and FOT ( free on truck ) for instance are some examples. Free Carrier was denoted as an incoterm which sufficiently covered all such modes.

Incoterms 2000

In this revision, there was an  amendment made in obligations pertaining to the clearance of customs.formats of incoterms were seen to have been simplified to reflect a sense of clarity in the incoterms to better facilitate the distribution of responsibility in Customs clearance.

Incoterms 2010

Rules under the d family were seen to have been consolidated under this revised version. Since concerns were raised over the security aspect, we see the addition of two new incoterms while four of them were done away with. DDU, DES, DAF and DEQ were eliminated while DAT and DAP were the incoterms introduced at this stage.

Some other modifications that were made at this stage include the obligation which urged information to be exchanged between the seller and buyer, for the implementation of security measures.

Incoterms 2020

Latest update on incoterms were published by the International Chamber of Commerce in the year 2020. This revision brought in the simplified version of incoterms while the parties involved in international commercial trade were  granted further freedom.

Choosing the right kind of incoterm for your transaction

Before you dwell into what incoterm you ought to choose, it would be prudent to conduct an analysis of the cost and benefit. You will thenbe able to ascertain benefits such as financial or tax arising out of the transaction. The analysis will also help you ascertain any potential legal implications that could arise at the destination.restrictions or regulations on goods import or export  that are specific to various regions for instance is something to ponder on.

Choose the incorrect incoterm, and you will find yourself facing issues that you could have avoided had you chosen theappropriate ones. Therefore, doing your research and taking thet time to understand each relevant incoterm would certainly  be helpful for you in the long run in avoiding future problems that are cost intensive.

What categories of incoterms will you find?

If you were to ascertain precisely the kind of relationship that exists between the buyer and the seller, then a set of acronyms which we refer to as incoterms is what most would turn to in the case of international commercial trade.

As such, outlining the obligations and risks borne by the parties to the transaction is what they do. For efficiency and ease of understanding, it would be best to first identify ascertain what exactly these incoterms are.

We see 11 types of incoterms that are in force currently, and they can be catigorised into four main categories, namely; E, D, F and C. The location of delivery and the party by whom costs are to be borne are the factors that come come into play when determining the type of incoterm to be used.

Subcategories are then formed depending on the type of scenario and requirement.

Category F 

This category of incoterms require sellers to delivery goods at the predetermined transportation mode as agreed by buyers. Responsibility for all consequential risks will then be borne by the buyer thereon.

Incoterms can be subcategorised into groups under this category, they include;

FAS (Free Alongside Ship)

The buyer will have to nominate a vessel, and it is alongside this vessel that the seller will be required to deliver the contracted goods. The risk of the goods delivered by the seller alongside the vessel nominated by the buyer will be with the buyer.

FCA (Free Carrier)

According to this incoterm, goods will be delivered by the seller to either the carrier, a premises ascertained or named, or a person nominated at the premises of the seller. It is imperative to clearly indicate the stage the risk would pass to the buyer.

FOB (Free on Board)

FOB resembles an instance when the buyer nominates a vessel on to which they would want their goods have delivered by the seller. The point at which the goods would be delivered on board the vessel is when the risk is said to pass to the buyer.

Category E

EXW or Ex Works is when the goods are placed at the premises of the seller or any other named premises where in the goods would be loaded and cleared by the buyer in light of export purposes.

Category C

In this catogy , all costs for until the point at which the goods reach its port of destination will be borne by the seller. From that point on, the risk is transferred to the buyer, ie when the goods are loaded on board the vessel or whichever mode of transportation

CIF ( Cost Insurance Freight)

This incoterm specifies that the seller must proceed to insure th buyer for any risk or damage or losses caused. This is quite commonly seen in relation to marine freight.

CFR (Cost Freight)

While this incoterm is closely associated with that of FOB, it requires the seller to bear  freight and costs in the delivery of goods to the port of destination.

CPT  (Carriage paid to)

The seller must bear the responsibility of arranging transportation for the delivery of goods to the port of destination, although this excludes insurance.

CIP (Carriage and insurance paid to)

This is closely associated with CPT, the only difference being the requirement on the part of the seller to have the goods insured

Category D

This catigory pertains to incoterms on the destination to which the goods are to be delivered.

DAP (Delivered at place)

This indicates a situation at which the seller would make the delivery of goods for the purpose of unloading them at the named destination port. The seller bears total responsibility until the goods reach the destination port.

DAT (Delivered at terminal)

Delivery of the goods to the destination will be carried out by the seller, which will take place upon the unloading of the goods.

DDP (Delivered duty paid)

In this case, it would be the sellers responsibility to bear risks and costs incurred when the goods are delivered at the premises named by the buyer. Costs incurred include the payment of duties, customs clearance, as well as the clearance for import and export

Why incoterms are imperative

The fundamental nature of incoterms in terms of international commercial trade is evident in its widespread use, to the point where it is a set of universal terms and conditions that govern most transactions.

Risk reduction

Language is something that is up for interpretation, and it is subject to change depending on who interprets it. Contracts typically stipulate well defined terms and conditions, but would this infact be sufficient in outlining the duties and obligations of parties engaging in activities on international

What incoterms seek to fulfill is the elimination of inconsistencies that exist from nation to nation.  For instance, D country would define a tariff to include the imposition of fees by local governments, while C country would define a tariff to include fees, and taxes imposed by state, local and federal governments.

Including one uniform explanation to define terms would offer a sense of clarity, thereby preventing potential issues in the future.

Avoiding problems

Encountering problems in international transactions and trade have taken a common place and as such are inevitable. It is important to have a sense of understanding before delving into the this vast topic, as it would indeed avoid potential issues that might pop up due to carelessness and negligence.

Other aspects a misused incoterm would tend to affect include schedules of delivery, payments, incurring of unnecessary costs.

One thing that is not included within the definitions provided by incoterms is ownership. Ownership exercised over goods is entirely separate. And so, parties to the contract must be careful as to avoid and be aware of fraudulent activities that misuse incoterms in this respect,

Enhances the ability to gain competitive advantages

If you would wish to have received payment for rendering services or goods, then incoterms could be considered essential in that respect. This is primarily since incoterms are said to define procedural as well as monetary aspects pertaining to international commercial trade.

Entities existing in the supply chain management would not use appropriate incoterms and thus would not potentially accept a wholesome payment of services and goods. As we know, rules and regulations vary from one domestic jurisdiction to another, and as such would result in a culture clash.

Essentially, incoterms seek to maintain an air of neutrality and standardization, and subsequently render a competitive advantage to all suppliers engaging in supply chains of the international arena. Definitions attributed to numerous terminology within local jurisdictions is likely to reduce the competitive advantages of parties involved.

Further subject to circumstances, terminology of incoterms would be detrimental to certain companies while they would work in favour of others. The existence of standardized definitions would potentially reduce unfair and fraudulent practices of business. This also reduces chances of parties incurring fines, damages and other penalties when conducting business in international commercial trade

The evolutionary nature of incoterms

Typically, incoterms undergo an extensive and comprehensive process of revision and a new update is published every ten years or so. This ensures that the incoterms would evolve with time to cater to the needs of transactions of the present day and age.

While terms included in contractual obligations would require the clear definition of incoterms, the appropriate shift of using incoterms to ascertain the responsibility borne by either the buyer ot seller would be dependent on the existing circumstances.

Buyers and sellers can ensure they stay in touch with these ever evolving rules and regulations by familiarizing themselves with the rules via research. Afterall, everything you need to know is out there on the internet and maintaining accuracy and clarity is only one click away!

Perhaps one of the most pivotal roles of incoterms is the maintenance of an ecosystem that is through and standardized within the arena of international commercial transactions and trade.

Incoterms even delve past language barriers, as buyers and sellers who would otherwise face such difficulties can now conduct business at ease and efficiently. The maintenance of standard practices in trade will quite certainly benefit those who are direct parties to the transaction.

Main incoterms in 2022

EXW (Ex Works)

The seller would under this agreement be in charge of the process of manufacture and making the goods available at a specified location. The buyer would be in charge of bearing costs on export, import and shipping to the named destination

FCA (Free Carrier)

Under this incoterm, the seller is required to be responsible in delivering the goods to sea port, terminal, carrier, warehouse or carrier to a named place by the buyer. Until such time when the goods are to be delivered to the carrier, the seller will have to bear associated costs.

The risk is then transferred to the seller once the goods have been safely transported to a port nominated by the buyer.

FAS (Free Alongside)

The goods will be arranged for delivery only upon placing them alongside the vessel at a port the the buyer nominated. The loading of the goods, clearance of customs and packing are the responsibility of the seller.

FOB (Free on Board)

Accordingly, the delivery of the goods will be done by the seller on board a vessel which has been cleared, for such purpose at a named port. It is upon the loading of the goods on board the vessel that the risk would transfer to the buyer.

CFR (Cost and Freight )

Under this incoterm, not only would it be the sellers responsibility to undertake the delivery of the goods to the port of destination, but will be responsible when bearing costs of transportation.

Insurance will typically be borne by the buyer, however this aspect is always negotiable. Upon the delivery of the consignment of the goods, the risk will pass to the buyer from the the seller.

CIF (Cost Insurance Freight )

As per Cost Insurance and Freight, the Seller will be responsible for the delivery of the the consignment to the port of nomination. Until such time the seller will have to bear costs pertaining to loading, packing, delivery, export and customs clearance, insurance as well as freight.

CPT (Carriage Paid To)

The seller, as per this incoterm will be responsible for the clearance fof goods and arrangement of the carriage, and the delivery of the goods to a place named or the carrier. The point of transfer of risk from the seller to the buyer in this case is when the custody of the goods are undertaken by the carrier.

CIP (Carriage and Insurance Paid to

Under this incoterm, the eller is responsible for insuring the goods while it is in transit. The seller will bear the risk up until the point in which the goods are to be delivered to the carrier.

DPU (Delivered at Place )

The seller has to deliver the goods to the buyer’s doorstep. Under this incoterm, alll associated costs, risks and responsibility apart from import duties will be borne by the seller

DAP (Delivered at Place)

The seller will bear the responsibility for the loading of the goods, at the port of desitinaiton, while the unloading will be undertaken by the seller. All costs associated until the point of loading will be undertaken by the seller.

DDP (Delivered Duty Paid)

Here, the seller is responsible for the delivery of the goods to the port of destination, while the unloading will be the buyer’s responsibility. Risks and costs must be undertaken by the seller until it is delivered at the destination

Noteworthy features of incoterms 2020

As such, Incoterms 2020 were introduced in the year 2020 to commemorate the centenary year of the ICC. The most recent revision displays a few noteworthy changes, as such it would be beneficial to understand what the updates entail and the effect they may have on international commercial trade.

Replacement of DAT with DPU

DAT, or Delivered at terminal is an incoterm which has been replaced with DPU, short for Delivered at Place Unloaded. This change has been introduced with aims or removing confusion which was seen over the years. Particularly, it was the term ‘terminal’ which was seen to have resulted in confusion. Where as, in the case of DPU, any destination where or not it is covered is included.

Differentiation of the insurance cover in CIP and CIF

Under both CIP and CIF incoterms, the seller is required to insure the goods on behalf of the buyer. While it was clause C of Institute Cargo which governed the requirement of insurance under incoterms of 2010, the updated term on insurance cover is governed under clause A of Institute Cargo. Clause A in particular is quite comprehensive and detailed in laying down the insurance level appropriate for goods that have undergone a process of manufacture. Commodities are what clause C would potentially apply to.

Update on listings and costs

What was seen as a pertinent issue in the version of incoterms of 2010, was addressed in the version of incoterms which was published in 2020. Due to the flexible nature which was apparent at the time, prices were subject to constant change by carriers, which often left sellers troubled and under grave inconvenience.

Costs have now been fixed that are specific to the parties involved, under rules A9 and B9 of the incoterms 2020.

Allocations, costs and requirements on security

Incoterms 2020 provide for more in depth and detailed requirements for the allocation of security and associated costs, as this is now viewed as a burgeoning need in the current day and age.

Transportation of buyer and seller

In the previous year’s incoterms, that is 2010, transport was assumed to have been undertaken by a transportation provider who was a third party. The new updated version however necessitates the provision of transportation by the seller or buyer themselves. It entails that either the seller or buyer would resort to transportation methods deemed fit by them, which may include planes, or trucks for the purpose of getting the goods delivered.

Buyer is able to resort to their preferred method of transportation by virtue of  FCA incoterm. Further, sellers are able to opt for their preferred method of transportation under DPU, DPP and DAP.

FOB, FCA and BoL procedure

Under the updated version of incoterms 2020, exporters resorting  to marine freight are encouraged to opt for FCA, this is in light of the practice of parties to use FOB when in fact FCA is what they ought to have chosen. The main reason why parties opt for FOB is the need to include their contracts under LOC (Letter of Credit).

Incoterms of 2020 have thereby been updated to include instructions of the buyer to carriers on the issue of a document on transportation which specifies an onboard notation.

Certified Member

© Aeon Shipping LLC. All Rights Reserved.
aeon shipping logo

© Aeon Shipping LLC. All Rights Reserved.