INCOTERMS

Incoterms, promulgated by the International Chamber of Commerce, is an acronym for “International commercial terms,” and provide a standard set of definitions for trade terms (also known as delivery terms and terms of sale) for use in international trade. The eleven terms (as of Incoterms 2010, effective January, 2011) are: EXW, FCA, FAS, FOB, CPT, CFR, CIF, CIP, DAT, DAP and DDP.

Incoterms facilitate international commerce by promoting common and precise understanding between a seller and buyer of their respective operational obligations, costs and passage of risk of cargo loss or damage under various specified delivery arrangements. Citing a particular Incoterm in a sales contract will also aid transportation intermediaries, banks, and service providers involved in shipping or financing the goods better performing their functions. Incoterms are also designed to reduce the likelihood of disputes between a seller and buyer over their respective responsibilities and costs.

Incoterms first edition was published in 1936, in English and French. Since then there have been five revisions at approximately 10 year intervals, with transaction into most commercially used languages. The 1990 revision first addressed the use of electronic messages (EDI) used in lieu of traditional shipping documents. The revision in 2000 made substantive changes to the customs clearance and payment of customs duty obligations under FAS and DEQ terms; and the loading and unloading obligations under FCA. And Incoterms 2010 eliminated terms DAF, DES, DEQ and DDU, replacing these with new terms DAT or DAP.

Note: Incoterms are separate and significantly different from American Foreign Trade Definitions, which are incorporated into the Uniform Commercial Code (UCC), continue to be used by some companies in domestic U.S. commerce, and have been recommended for deletion from the UCC.

EXW

Abbreviation for ex works, the Incoterm (delivery term) under which the Seller is responsible only for making the goods available at his designated premises for pick up by the buyer or buyer’s designated transportation carrier. Upon release of the goods to the buyer or carrier, the seller has no further responsibilities; all costs and risks of transportation transfer to the buyer. Variations on the this term ex works include ex factory, ex mill, ex plant, ex refinery, ex site, ex warehouse, etc., depending upon the type of origin facility at which goods will be delivered to the buyer by the seller.

Action responsibilities, division of costs and passage of risk, EXW terms may be illustrated as follows when the principal modes of transportation are airfreight and ocean freight:

The official Incoterms publications (Incoterms 2010) may be ordered from the International Chamber of Commerce.

FCA

(Incoterms) Abbreviation for free carrier (named place). The Incoterm (delivery term) under which the seller is responsible for handing over the goods, cleared for export, to a transportation carrier named by the buyer at a named location, typically at either the seller’s facility or else the terminal of the buyer-nominated carrier or freight forwarder, typically within the country of export. If the FCA point is the seller’s facility, and loading the conveyance is essential to “handing over the goods,” the seller is responsible for the risk and expense of loading (if loading is not otherwise included in the carrier’s basic transportation charge). FCA, shipper’s facility, is the appropriate delivery term for situations in which the shipper will load an intermodal container, truck trailer, rail car, barge or other conveyance.

The seller is not responsible for the cost of unloading the conveyance at the named destination point, nor for transfer of the goods to the on-carrier. For example, if the FCA point is an ocean carrier and/or inland waterway terminal (other than the seller’s own facility), the buyer is responsible for unloading the incoming FCA conveyance, inclusive of forklift charge or other expenses, and for loading the outgoing vessel (e.g., the terminal charges, or wharfage and handling charge, etc.). See also FOB (vessel), under which the seller is additionally responsible for the cost of loading the vessel. Under FCA terms, the seller has no obligation to insure the shipment.

Action responsibilities, division of costs and passage of risk under FCA terms may be illustrated as follows when the principal modes of transportation are airfreight and ocean freight:

Responsibility for govern security requirements: Incoterms 2010 changed rules A2 & B2, now captioned “Licenses, authorizations, security clearances and other formalities,” to include government imposed security requirements, whatever they may be, as part of export formalities and import formalities. The trading party responsible for export formalities is thus responsible for security requirements in the export country whereas the party responsible for import formalities is responsible for security responsibilities in the import country. For security requirements in a transit country, if any, if the seller has accomplished delivery under the applicable term, the buyer is responsible for this; otherwise security requirements are the seller’s responsibility.

FAS

(Incoterms) Abbreviation for free alongside. The Incoterm (delivery term) under which the seller is responsible for arranging transportation of the goods to a named ocean or inland waterway port and placing them “alongside” the vessel which the buyer has arranged to transport the goods. The seller is also responsible for export clearance (under pre-2000 versions of Incoterms, this was the buyer’s responsibility). For this reason, FAS terms require special coordination by the shipper or freight forwarder with the inland carrier and water carrier. Under FAS terms, the seller has no obligation to insure the shipment. See Also definitions for ship’s rail, ship’s tackle and shipside delivery.

Note: This term is used for shipment via ocean and inland water transportation only and is different from FOB in that the seller is not responsible for placing the goods on the vessel.

Action responsibilities, division of costs and passage of risk, FAS terms may be illustrated as follows:

Responsibility for government security requirements: Incoterms 2010 changed rules A2 & B2, now captioned “Licenses, authorizations, security clearances and other formalities,” to include government imposed security requirements, whatever they may be, as part of export formalities and import formalities. Under FAS terms, the seller is responsible for export formalities and thus also security requirements in the export country whereas the buyer is responsible for import formalities and thus for security responsibilities in the import country. For security requirements in a transit country, if any, since the seller has already accomplished delivery, the buyer is responsible for this.

FOB

(Incoterms) Abbreviation for free on board. The Incoterm (trade term) under which the seller is responsible for arranging transportation of goods to a vessel named by the buyer at a named port, and for all costs of placing the goods on board the vessel if this not included in the ocean carrier’s basic transportation rate (which it rarely is—see terminal charge, handling charge). The seller’s responsibility is satisfied when the cargo is “on-board” the vessel. The seller is not responsible for costs of actually stowing the goods on board, but is responsible for that portion of the terminal charges which cover services other than stowage and vessel wharfage charges. The seller is not responsible for the cost of ocean carriage, marine cargo insurance, nor for arranging the contract of carriage unless the buyer requests his assistance with this. This Incoterm may never be used alone; rather it must be clarified by stating a specific location, an, because of possible uncertainty as to mode (see box below) the type of conveyance (e.g., “FOB vessel, Baltimore”).

Important

Under Incoterms 1990 and 2000, “FOB” may be used only for shipments via vessel (prior to these editions, “fob” could be used with other transportation modes). However, “fob” remains applicable to all modes under the American Foreign Trade Definitions (terms of sale). Furthermore, as traditionally used, “fob” can become ambiguous as to whether it means on board the carrier at point of origin vs. destination. For example, “FOB truck, Baltimore” would typically describe a shipment originating in Baltimore by truck. But it might also be used to describe goods shipped prepaid by a supplier consigned to an exporter, at a port city, hold and notify the exporter or his freight forwarder. To eliminate these problems, and to create the precision needed for EDI transactions, Incoterms 1990 dropped all use of “FOB” except with respect to the trade term under which the seller is responsible for placing the cargo on-board a vessel at a named origin port. Otherwise, “FOB” was replaced with “FCA.” Notwithstanding this change in the Incoterms, “fob” continues to be widely used domestically and by U.S. exporters for modes of transportation other than vessel, which can result in ambiguity and confusion. When in doubt as to the intention of the seller/shipper as to their use of “fob” for a particular transaction, always clarify this before further dispatching or forwarding cargo.

See also definitions for FOB stowed (FOBS), FOB stowed and trimmed (FOBST), FOBFO and FOBLO, which are used with charter vessels and/or bulk vessels, and FOB liner.

Action responsibilities, division of costs and passage of risk, the FOB trade term may be illustrated as follows:

 

CPT

(Incoterms) Abbreviation for carriage paid to; the Incoterm (delivery term) under which the seller is responsible for arranging transportation and paying the freight for goods to a named point, typically in the destination country. Note, however, that the seller has fulfilled his obligation when he has tendered the goods to the transportation carrier who, under the contract of carriage, will accomplish this transportation to the named point. At this point, typically in the origin country, the buyer assumes the risk of loss of the goods and/or unforeseeable costs. This Incoterm may be used with any transportation mode, including through multimodal movements. Under CPT terms, the seller has no obligation to insure the shipment.

In terms of action responsibilities, division of costs and passage of risk, CPT terms may be illustrated as follows where the principal modes of transportation are airfreight and ocean freight:

Responsibility for government security requirements: Incoterms 2010 changed rules A2 & B2, now captioned “Licenses, authorizations, security clearances and other formalities,” to include government imposed security requirements, whatever they may be, as part of export formalities and import formalities. Under CPT terms, the seller is responsible for export formalities and thus also security requirements in the export country whereas the buyer is responsible for import formalities and thus for security responsibilities in the import country. For security requirements in a transit country, if any, since the seller has already accomplished delivery, the buyer is responsible for this.

CFR

(Incoterms) Abbreviation for cost and freight; the Incoterm (delivery term) under which the seller is responsible for arranging and paying for transportation of the goods (but not shipping insurance) through to a named ocean/inland waterway destination port, typically in the destination country. Note, however, that the seller has fulfilled his obligation when he has tendered the goods to the transportation carrier who, under the contract of carriage, will accomplish this transportation to the named point. When the cargo is “on-board” the vessel, typically in the origin country, the risk of loss of the goods and/or unforeseeable costs transfers to the buyer. This Incoterm may be used only with ocean or inland waterway transportation for cargo delivered directly to the vessel (i.e., cargo shipped loose or in bulk, aboard a breakbulk vessel, ro-ro vessel, bulk vessel, etc.); it is not used for cargo to be shipped in an intermodal container via a container vessel, where the correct term for delivery to a foreign port or inland container yard is CPT.

Action responsibilities, division of costs and passage of risk, CFR terms may be illustrated as follows:

Responsibility for government security requirements: Incoterms 2010 changed rules A2 & B2, now captioned “Licenses, authorizations, security clearances and other formalities,” to include government imposed security requirements, whatever they may be, as part of export formalities and import formalities. Under CFR terms, the seller is responsible for export formalities and thus also security requirements in the export country whereas the buyer is responsible for import formalities and thus for security responsibilities in the import country. For security requirements in a transit country, if any, since the seller has already accomplished delivery, the buyer is responsible for this.

CIF

(Incoterms) Abbreviation for cost, insurance and freight; the Incoterm (trade terms) under which the seller is responsible for arranging and paying for transportation of the goods and shipping insurance through to a named ocean or inland waterway destination port. Note, however, that the seller has fulfilled his obligation when he has tendered the goods to the transportation carrier who, under the contract of carriage, will accomplish this transportation to the named point. Once the cargo is “on-board” the vessel, typically in the origin country, the risk of loss of the goods and/or unforeseeable costs transfers to the buyer.

Note that under Incoterms, CIF is used only for ocean or inland waterway shipment, and then only for cargo shipped loose or in bulk (e.g., via a breakbulk vessel, ro-ro vessel or bulk vessel), and not for cargo shipped in an intermodal container via a container vessel, where the CIP term is used for this other mode shipments where the seller is responsible for insuring and paying freight through to a named destination point/airport.

Action responsibilities, division of costs and passage of risk, CIF terms may be illustrated as follows:

Responsibility for government security requirements: Incoterms 2010 changed rules A2 & B2, now captioned “Licenses, authorizations, security clearances and other formalities,” to include government imposed security requirements, whatever they may be, as part of export formalities and import formalities. Under CIF terms, the seller is responsible for export formalities and thus also security requirements in the export country whereas the buyer is responsible for import formalities and thus for security responsibilities in the import country. For security requirements in a transit country, if any, since the seller has already accomplished delivery, the buyer is responsible for this.

CIP

(Incoterms) Abbreviation for carriage and insurance paid to; the Incoterm (delivery term) under which the seller is responsible for arranging and paying for both the transportation of the goods and shipping insurance through to a named destination point, typically in the destination country. Note, however, that the seller has fulfilled his obligation when he has properly insured the goods and tendered them to the transportation carrier who, under the contract of carriage, will accomplish this transportation to the named point. At this point, typically in the origin country, the risk of loss of the goods and/or unforeseeable costs transfers to the buyer.

This Incoterm may be used with any transportation mode, including cargo to be shipped in intermodal containers aboard a container vessel, and through multimodal movements. (For cargo shipped loose or in bulk via vessel, CIF would typically be used instead of CIP for port-to-port ocean or inland waterway shipments where seller was to provide insurance.)

Action responsibilities, division of costs and passage of risk, CIP terms may be illustrated as follows where the principal modes of transportation are airfreight and ocean freight:

Responsibility for government security requirements: Incoterms 2010 changed rules A2 & B2, now captioned “Licenses, authorizations, security clearances and other formalities,” to include government imposed security requirements, whatever they may be, as part of export formalities and import formalities. Under CIP terms, the seller is responsible for export formalities and thus also security requirements in the export country whereas the buyer is responsible for import formalities and thus for security responsibilities in the import country. For security requirements in a transit country, if any, since the seller has already accomplished delivery, the buyer is responsible for this.

DAT

(Incoterms) Abbreviation for delivered at terminal, the Incoterm (delivery term) under which the seller is responsible for delivering the goods, export cleared, to the carrier’s terminal at the named destination location, unloaded from the delivering conveyance, available for customs clearance and/or pick-up by the buyer. Under DAT terms, the seller assumes the cost and risk of unloading at the named destination terminal, where as the buyer is responsible for customs clearance. This term may be used with any transportation mode, including through intermodal transportation, and for international as well as domestic sales transactions.

Allocation of responsibilities, division of costs and passage of risk under DAT terms may be illustrated as follows for international delivery via airfreight, ocean freight and truck transportation:

Note: DAT is new under Incoterms 2010, replacing Incoterm DEQ, but may be used with any mode of transportation, including through intermodal transportation.

or use with any mode of transportation.

See also DAP, under which the seller is not responsible for unloading the delivering conveyance place of delivery, but rather only for placing the cargo “at the disposal of the buyer” on board the conveyance at the named place of delivery.

Under DAT terms, the seller has no obligation to insure the shipment. In contrast to “C” terms in which the seller’s risk terminates once he has tendered the goods over to the export carrier in the origin country, under this and other “D” terms, the seller remains at risk for cargo loss or damage until delivery occurs at the named destination point.

Responsibility for government security requirements: Incoterms 2010 changed rules A2 & B2, now captioned “Licenses, authorizations, security clearances and other formalities,” to include government imposed security requirements, whatever they may be, as part of export formalities and import formalities. Under DAT terms, the seller is responsible for export formalities and thus also security requirements in the export country whereas the buyer is responsible for import formalities and thus for security responsibilities in the import country. For security requirements in a transit country, if any, since the seller has already accomplished delivery, the buyer is responsible for this.

DAP

(Incoterms) Abbreviation for delivered at place, the Incoterm (delivery term) under which the seller is responsible for delivering the goods, export cleared, to a named destination place, on-board the transportation conveyance, available (“at the disposal of the buyer”) for unloading by the buyer. Under DAP terms, the buyer assumes the cost and risk of unloading at the named destination place and for customs clearance. This term may be used with any transportation mode, including through intermodal transportation, and for international as well as domestic sales transactions.

Allocation of responsibilities, division of costs and passage of risk under DAT terms may be illustrated as follows for international delivery via truck transportation:

Note: DAP is new under Incoterms 2010, replacing Incoterms DAF, DES, and DDU.

See also DAT, under which the seller is additionally responsible for the costs of unloading the delivering conveyance place of delivery (e.g., the delivering carrier’s terminal or another cargo terminal as the designated place of delivery).

Under DAP terms, the seller has no obligation to insure the shipment. In contrast to “C” terms in which the seller’s risk terminates once he has tendered the goods over to the export carrier in the origin country, under this and other “D” terms, the seller remains at risk for cargo loss or damage until delivery occurs at the named destination point.

Responsibility for government security requirements: Incoterms 2010 changed rules A2 & B2, now captioned “Licenses, authorizations, security clearances and other formalities,” to include government imposed security requirements, whatever they may be, as part of export formalities and import formalities. Under DAP terms, the seller is responsible for export formalities and thus also security requirements in the export country whereas the buyer is responsible for import formalities and thus for security responsibilities in the import country. For security requirements in a transit country, if any, since the seller has not yet accomplished delivery, the seller is responsible for this.

DDP

(Incoterms) Abbreviation for delivered duty paid. The Incoterm (delivery term) under which the seller is responsible for arranging transportation of the goods through to the buyer’s door, and pays all costs required to accomplish this, including customs clearance, customs duty, and taxes due upon importation. Under pre-1990 versions of Incoterms, and under American Foreign Trade Definitions, this is also known as free domicile or free house. Under DDP terms, the seller has no obligation to insure the shipment. This Incoterm may be used with any transportation mode or combination of modes.

Action responsibilities, division of costs and passage of risk, DDP terms may be illustrated as follows where the principal modes of transportation are airfreight and ocean freight: