What are Incoterms? (ExW, FOB, CFR, CPT,…)

Incoterms 2010 (FCA, DAP, EX WORKS, CIF, FOB, CFR, DAT, etc.) define, in a purchase contract, the responsibilities of the buyer and the supplier in the transaction: transfer of ownership of the goods, payment of transportation costs and insurance, loading and unloading risks.

Incoterms have been issued by the International Chamber of Commerce in 2010 and revised in 2013.

Incoterms 2010 can be grouped in categories, which are “C” (CFR, CIF, CIP, CPT), “D” (DAP, DAT, DDP, DDU, DAF, DES), “E” (EX WORKS”), and “F” (FCA, FAS, FOB).  Each Incoterm 2010 carries a set of responsibilities for the buyer and the seller, that should be understood before accepting a contract (by both parties!). Let’s review the most common Incoterms 2010 and their implications.

C-INCOTERMS 2010

CFR (Cost and Freight)

CFR means that the seller must pay the costs and freight necessary to bring the goods to the named port of destination but the risk of loss of or damage to the goods, as well as any additional costs due to events occurring after the time the goods have been delivered on board the vessel is transferred from the seller to the buyer when the goods pass the ship’s rail in the port of shipment.

The CFR term requires the seller to clear the goods for export.  This term can only be used for sea and inland waterway transport.

CIF (Cost, Insurance, and Freight)

CIF means that the seller delivers the goods on board the vessel or procures the goods already so delivered.

The risk of loss of or damage to the goods passes when the goods are on board the vessel. The seller must contract for and pay the costs and freight necessary to bring the goods to the named port of destination.

The seller also contracts for insurance cover against the buyer’s risk of loss of or damage to the goods during the carriage. The buyer should note that under CIF 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.

DIFFERENCE BETWEEN CIF AND CFR

The difference between these two Incoterms is that under the CIF term, the seller has to ensure the goods, whereas under the CFR Incoterm the buyer has this responsibility. CFR is used when a buyer prefers to rely on its own insurance company, rather than the sellers.

DIFFERENCE BETWEEN CIF, CFR, AND FOB (FREE ON BOARD)

With CIF/ CFR agreements, the seller has a wider responsibility as has to arrange and pay for the transportation of the goods to a remote place; under the FOB term, instead, the seller is responsible to deliver the goods cleared for export at a departure port (generally in its own country).

CIP (Carriage and Insurance Paid To)

Under the CIP Incoterm, “Carriage and Insurance paid to…”, the seller delivers the goods to a carrier of his choice and pays the transport to a named destination agreed between the parties and states in the Incoterm, whereas the buyer bears all risks and costs occurring after the delivery of the goods to the carrier.

When CIP is the agreed Incoterm, the seller has to arrange and pay the insurance for the transport (loss of or damage to the goods). Such insurance shall cover the minimum value of the goods (differently from other arrangements, as CIF, where the value of the insurance generally exceeds the value of the goods).

The buyer, and not the seller, shall purchase insurance to cover an amount exceeding such minimum value.

The word «carrier» mentioned in this Incoterm means any company and/or person who, under a carriage contract, undertakes to perform or to procure a transportation service, by rail, road, air, sea, inland waterway or multimodal. If more than one carrier is used for transporting the goods to destination, then the risk passes from seller to buyer as the goods have been delivered to the first carrier.

Seller shall clear the goods for export under a CIP contract. This Incoterm may be used for any transport mode, including multi-modal.

CPT (Carriage Paid to…)

Under a CPT Incoterm, “Carriage paid to…”, the seller has to deliver the goods to a carrier and bears the costs and the risks to transport the goods to a named destination point, agreed with the buyer and mentioned in the term itself (example: “Carriage Paid to Madrid, Spain”).

The risk of damage or loss to the goods is transferred from the seller to the buyer as soon as the goods have been delivered to the carrier. On the other hand, the buyer bears the shipping costs to move the goods from the agreed destination to the final arrival point if any. Under the CPT term, the seller is responsible to clear the goods for export.

This Incoterm can be used regardless of the mode of transport including multimodal.

DIFFERENCE BETWEEN CIP AND CPT INCOTERMS

CIP is the same as CPT with the only exception that the seller also has to provide and pay for the insurance against the buyer’s risk of loss or damage to the goods during the carriage to the named destination. As for CPT, CIP term may be used for any mode of transportation.

D-INCOTERMS 2010

DAP (DELIVERY AT PLACE…)

Under the DAP Incoterm, which means “Delivery at Place”, the seller is responsible to transport the goods from the point of departure (its business location, warehouse or subsupplier) to a nominated place of destination, ready to be unloaded. The place of destination shall be defined as clearly as possible, to prevent litigation at delivery.

With a DAP term, the seller bears all risks and costs until the goods are delivered to the named place (and is responsible to arrange the physical transportation of the merchandise up to that point). The seller, and not the buyer, shall also bear the costs to unload the goods at the destination place, and such costs cannot be charged back to the buyer.

Under DAT, also, the seller arranges and pays the export clearing activities, whereas buyer has to arrange and pay the import clearance activities and the related taxes and levies, if applicable. The Incoterm “Delivery at Place” can be agreed between the exporter and the importer for any mode of transportation, such as land, sea, air and, railways.

Buyer and seller obligations under DAP term:

SELLER OBLIGATIONS	BUYER OBLIGATIONS
1. Provision of goods The seller must deliver the goods, provide a commercial invoice or an equivalent electronic document, provide evidence of conformity or proof of delivery	1. Payment The buyer must pay the price of goods as agreed in the contract of sale
2. Licenses, authorizations, and formalities The seller must provide export licenses or local authorizations for exporting goods	2. Licenses, authorizations, and formalities The buyer must get an export license and import permit for the export of goods
3. Contracts of carriage and insurance Contract of the carriage at sellers expense in the usual route to the agreed point of delivery	3. Contracts of carriage and insurance Contract of the carriage without obligation. Contract of insurance without obligation
4. Delivery The seller must deliver the goods not unloaded at the agreed point and time	4. Taking delivery Take delivery of the goods at the agreed place of destination
5. Transfer of risks The seller is responsible up to the goods are available as agreed	5. Transfer of risks The buyer must bear all risks of loss of or damage from the time the goods have been made available in the agreed place of delivery
6. Costs The seller must pay: Any cost of the main carriage, loading at the place of origin, export clearance at origin	6. Costs The buyer pays forAll cost relating since goods are available, import customs duties and taxes, unloading at place of destination
7. Notice to the buyer The seller must notify the buyer that goods have been delivered	7. Notice to the seller The buyer must provide time of shipment and port of destination
8. Proof of delivery, transport document or equivalent electronic message At his own expense, a document that allows the buyer to pick up the goods	8. Proof of delivery, transport document or equivalent electronic message At his own expense, a document that allows the buyer to pick up the goods
9. Checking – packaging – marking The seller must bear the cost of checking, quality control, measuring, weighing, counting, packing of goods and marking. If a special package is required, the buyer must inform and the seller and agreed on extra expenses	9. Inspection Unless it’s mandatory at an origin, pay any pre-shipment inspection
10. Other Assist obtaining additional information required by the seller	10. Other Assist obtaining additional information required by the seller

DAT (“DELIVERY AT TERMINAL…”)

Under the DAT Incoterm, which means “Delivery at Terminal”, the seller clears the goods for exports and is responsible for all logistics activities up to a nominated Terminal of arrival. Such terminal may be a quay, a warehouse, a container yard or any road for rail, air or road location (example an airport).

The seller shall make the goods available to the buyer, or a buyer’s agent, unloaded at the named terminal, whose name shall be properly specified (example “DAT Kuwait Airport”, not “DAT Kuwait”). The DAT Incoterm can be used for any mode of transportation, land, air, sea, railways – if a specific terminal can be defined in the contract.

Despite this wide range of potential applications, the DAT Incoterm was specifically designed for deliveries happening at the airport and seaport’s terminals.

The seller arranges and pays the transportation of the goods from departure to the airport terminal, or the container yard at the arrival seaport, whereas the buyer has to collect the goods at the named terminal, arrange and pay the customs clearance activities, the applicable taxes and duties and move the goods from the terminal to the final receipt point (example a project site).

DDP (“DELIVERY DUTY PAID”)

Under the DDU Incoterm, which stands for ‘Delivery Duty Paid’, the supplier arranges and pays the transportation, the export/import clearance activities, the applicable tax, duties and levies applicable at export/import from the departure to the destination point mentioned in the contract, and has the overall responsibility to make the goods available to the buyer to a named destination.

Due to this wide range of responsibilities that the DDP sets for the seller, this Incoterm is definitely the riskiest clause for exporters and shall be thoroughly understood before being accepted. The Delivery Duty Paid Incoterm can be used for any transportation type.

Likewise DAP, a DDP term shall, therefore, specify a precise location (example: “DDP Houston, Harbour Street 12 – USA”).

DDU (“DELIVERY DUTY UNPAID”)

Back in 2010, the International Chamber of Commerce’s 8th publication introduced the DAP Incoterm to replace, basically, the Delivery Duty Unpaid (DDU) term. Even if the DDU Incoterms may still be spotted in some old contracts, buyers and sellers are invited to replace it with DAP in the new ones. The ICC has dropped DDU completely since 2013.

Under the DDU Incoterm, the seller had the obligation to deliver the goods, not cleared for import, and not unloaded at a named place of destination agreed between the parties.

The seller had to bear the costs and the risks involved to ship the goods to such destination excluding any duty and tax applicable in the country of destination. Under the delivery and duty unpaid Incoterm, the seller was not even responsible for carrying out of customs formalities.

Any cost, risk, and duty related to the import of the goods in the destination country had to be borne by the buyer (who took over the risks, as well, for delays in import operations and the consequent costs).

DDU was used regardless of the mode of transport but the DES or DEQ Incoterms were preferred for deliveries to the port of destination on board the vessel or ex-quay.

DAP vs DDP

If the seller has to clear the goods and pay the applicable import taxes and levies, then the DDP term shall be used instead of DAP.

DDP vs EXW

Under the DDP Incoterm, the seller bears any risks and costs to deliver the goods to a final destination. Under EXW, instead, the buyer (and not the seller) bears such responsibilities and costs.

Therefore, the two terms set exactly opposite responsibilities for sellers (minimum for EXW, maximum for DDP).

The DAP term, which replaced the old DDU Incoterm, should be generally preferred by sellers – to make sure import risks and costs are transferred (and managed) by the buyer.

Not in all cases, in fact, sellers can easily manage the activities required to import goods legally in a foreign country.

DDP AND VALUE ADDED TAX (VAT)

If the parties want to exclude from the seller´s obligations the payment of the value-added tax in the importing country (VAT), such arrangement should be clearly outlined in the contractual Incoterm statement (Example: DDP Houston, Harbour Street 12 – the USA, VAT unpaid).

DAF (“DELIVERED AT FRONTIER…”)

The Delivered at Frontier Incoterm, “DAF”, is generally used for goods transported by land (even if it could be theoretically applied for any other transportation mode, such as by sea, railways, and by air).

Under the DAF Incoterm, the seller fulfills its delivery obligations when the goods are placed at buyer’s disposal on the arriving means of transport (generally a truck) not unloaded, cleared for export, not cleared for import at the named point and place at a nominated frontier, but before the customs border of the next country to be crossed (any frontier may apply, even the exporter’s).

The exact frontier’s name has to follow the “DAF” acronym to make the agreement clear and valid (example: “DAF Como Brogeda Frontier, Italy”).

However, if the parties wish the seller to be responsible to unload the goods and to bear the related costs and risks, this should be made clear by adding explicit wording to this effect in the contract of sale (example: “DAF Como Borgeda Frontier, Italy – unloaded”).

For goods that have to be transported by sea, and the delivery has to take place at a port of destination, on board a vessel or on the quay (wharf), then the DES or the DEQ Incoterms should be used instead of DAF.

DES (“DELIVERED EX-SHIP”)

DES (delivered ex-ship) means that the seller has fulfilled its delivery obligations when the goods are placed at the disposal of the buyer on board the ship at the arrival port, not cleared for import.

The shipper has to bear all the costs and the risks to transport the goods until the port of destination agreed by the parties and is not responsible to unload the goods from the ship.

The DES Incoterm is used when the goods have to be delivered by sea or by inland waterway (or in case of multimodal transportation involving the navigation to a seaport).

DEQ (“DELIVERY EX-QUAY”)

The DEQ Incoterm is similar to DES, with one difference: under DEQ, the seller (and not the buyer) is responsible to unload the goods from the ship at the arrival port (and to bear the costs and the risks of such activity).

E-INCOTERMS 2010

“EX-WORKS” (EXW)

When the Ex-works Incoterms is stipulated in a sales and purchase contract, the seller has to deliver the goods at his premises (own or third party warehouse) and the buyer has to arrange for collection and transportation to the final destination, carrying all the risks and the costs of the logistics operations after the delivery.

The EXW Incoterm is favorable to the seller, and less favorable to the buyer, as the buyer takes over the burden, and the associated risks, to deliver the goods to the final destination – and the seller is relieved from any responsibility after making the goods available to the buyer at its own business location.

After goods have been manufactured and packaged, the seller sends a “readiness advice” to the buyer. Upon receipt of such advice, the buyer has to plan, arrange and execute any subsequent logistics activity to fetch the goods to the destination location (example loading on the truck or the railway, transportation of the goods via road, railway, sea or air, clear the goods in export and import, store the goods at any intermediate point, unload the goods at arrival, etc.).

The seller may, of course, help the buyer with the loading operations, however, if goods are damaged during this activity, the buyer, and not the seller, bear any financial responsibility.

A buyer shall accept the EXW Incoterm only when sure to be able to manage all the activities to move the goods from the exporting to the importing country, including the customs’ clearance activities at export and import (which may be tricky in some countries).

Indeed, even if the seller has a general obligation to support the buyer with such activities, the buyer is ultimately responsible under this Incoterm. If the buyer and the seller are located in the same country, then the acceptance of an EXW delivery is less risky and troublesome.

DIFFERENCE BETWEEN EXW AND FOB

The FOB term is a variation of the ex-works agreement, used for deliveries that happen at a specific point of departure instead of the seller’s premises. Under this term, the seller undertakes the costs and the risks to transfer the goods to a shipping terminal and to clear the goods at export to make them freely available on board a vessel.

For FOB shipments though, the buyer is responsible to arrange and pay the shipment of the goods from the departure to the destination point and to clear the goods at import. Under FOB, the buyer is also responsible to organize and pay the insurance cost for the traveling goods.

F-INCOTERMS 2010

FCA (AND DIFFERENCE FCA vs. EXW)

The FCA Incoterm (Free Carrier) is sometimes confused with the EXW term, however, they imply different responsibilities for buyers and sellers. Under the FCA Incoterm, the seller has to deliver the goods cleared for export to a buyer’s nominated carrier at a named place (example: “FCA Geodis warehouse, Lisbon – Portugal”).

The main differences between EXW and FCA can be summarized as follows:
Export Custom’s Clearance

• EXW: the exporter has no obligation to clear the goods for export. The importer has to arrange and pay the export clearance operations
• FCA: the exporter has to clear the goods for export (buyer is responsible for the import operations)

Delivery 

• EXW: exporter has no obligation to load the goods on the buyer’s truck(s)
• FCA: exporter shall load the goods on buyer’s truck(s) in case the nominated place corresponds to the seller’s place of business. However, if the delivery has to take place at a different place, the seller is not responsible for unloading and loading the goods.

Application 

• EXW: typical for domestic sales or sales within free trade zones (like the European Union)
• FCA: typical for international trading operations, where export clearance is mandatory

FAS (Free Alongside Ship)

Free Alongside Ship is an Incoterm used only for sea or inland waterway transportation. Under the FAS term, the seller has fulfilled the delivery as the goods are placed alongside the vessel at a named port of shipment agreed with the buyers and specified in the term. As a consequence, the buyer has to take over any cost and risk of (loss of or damage) related to the goods from that moment onwards.

Generally, the seller has to clear the goods for export under FAS agreements (this reversed a previous Incoterm version, where such responsibility was on buyer’s side).

Nevertheless, in case the parties still want the buyer to be responsible for clearing the goods (export), they may add explicit wording to this effect in the sale contract.

FOB (Free on Board)

Under this Incoterm, the seller has the responsibility (and takes over the costs) to deliver cleared goods on the vessel at the named departure port (example: “Rotterdam”). Any other shipping expense and risk, from that point onward, has to be borne by the buyer.

Under the Free on Board Incoterm, the risk of the goods is transferred from the seller to the buyer as they are loaded on the vessel at the port of departure. Under the FOB Incoterm, the buyer is liable, and not seller, in case the goods are lost, damaged or destroyed during the transportation. This Incoterm is very popular with Chinese suppliers of pipes and pipe fittings.

BUYER AND SELLER RESPONSIBILITIES BY TYPE OF INCOTERMS 2010

The table shows the sharing of responsibilities and costs between buyers and supplier according to the chosen incoterm (source: Incoterms 2010)

TYPE OF INCOTERM	Carriage of Goods	Risks	Costs
EXW	Carriage to be arranged by the buyer	Risk transfer from the seller to the buyer when the goods are at the disposal of the buyer	Cost transfer from the seller to the buyer when the goods are at the disposal of the buyer
FCA	Carriage to be arranged by the buyer or the seller on the buyer’s behalf	Risk transfer from the seller to the buyer when the goods have been delivered to the carrier at the named place	Cost transfer from the seller to the buyer when the goods have been delivered to the carrier at the named place
CPT	Carriage to be arranged by the seller	Risk transfer from the seller to the buyer when the goods have been delivered to the carrier	Cost transfer at the port of destination, buyer paying such costs as are not for the seller’s account under the contract of carriage
CIP	arrange and insurance to be arranged by the seller	Risk transfer from the seller to the buyer when the goods have been delivered to the carrier	Cost transfer at the port of destination, buyer paying such costs as are not for the seller’s account under the contract of carriage
DAT	Carriage to be arranged by the seller	Risk transfer from the seller to the buyer when the goods are delivered and unloaded at terminal	Cost transfer from the seller to the buyer when the goods are delivered and unloaded at the terminal
DAP	Carriage to be arranged by the seller	Risk transfer from the seller to the buyer when the goods are delivered to named place ready for unloading	Cost transfer from the seller to the buyer when the goods are delivered at named place ready for unloading
DDP	Carriage to be arranged by the seller	Risk transfer from the seller to the buyer when the goods are placed at the disposal of the buyer	Cost transfer from the seller to the buyer when the goods are placed at the disposal of the buyer
FAS	Carriage to be arranged by the buyer	Risk transfer from the seller to the buyer when the goods have been placed alongside the ship	Cost transfer from the seller to the buyer when the goods have been placed alongside the ship
FOB	Carriage to be arranged by the buyer	Risk transfer from the seller to the buyer when the goods pass the ship’s rail	Cost transfer from the seller to the buyer when the goods pass the ship’s rail
CFR	Carriage to be arranged by the seller	Risk transfer from the seller to the buyer when the goods pass the ship’s rail	Cost transfer at the port of destination, buyer paying such costs as are not for the seller’s account under the contract of carriage
CIF	Carriage and insurance to be arranged by the seller	Risk transfer from the seller to the buyer when the goods pass the ship’s rail	Cost transfer at the port of destination, buyer paying such costs as are not for the seller’s account under the contract of carriage

Incoterms illustrations: Source

THE INTERNATIONAL CHAMBER OF COMMERCE (ICC)

The International Chamber of Commerce is an important institution to support trading operations, with operations all over the world. It has thousands of member companies in over 130 countries and a broad range of business interests. ICC was founded in France in 1919, and the International Court of Arbitration was born in 1923.

The Chamber runs also a large number of committees and experts, ranging in all industries, and works in close cooperation with other important political and business associations as the United Nations, the World Trade Organization (WTO) and other governmental entities focused on financial and economic matters.

THE ROLE OF ICC

The ICC scope is to sustain international trade among the member countries and companies and promote an open market for goods, services, and capital. ICC is responsible for:

• Establish international trade rules and guidelines (one example are Incoterms 2010);
• Resolve disputes between members and states;
• Advocate trade policies;
• Combat commercial crime and corruption to promote economic growth

While ICC is not a normative body, thousands of business transactions happen on a daily basis under the policies set by this organization.