Incoterms – “International Commercial Terms” – are rules of international trade defined by the International Chamber of Commerce every 10 years.
Incoterms define the obligations of the seller and the buyer in a commercial transaction: delivery, insurance, transport, risks, and mandatory documents to settle the payment.
Two main classes
In total, there are 11 different Incoterms, however not all Incoterms work with all types of transport. There are in fact two main classes of Incoterms:
- Multimodal Incoterms
- Maritime Incoterms.
Incoterms – Multimodal
Multimodal Incoterms are used when the contract covers one or more modes of transport (Air, Sea, Land, and Rail).
There are 7 multimodal Incoterms covering the obligations of the importer and the exporter during the transportation of the goods from one country to another:
CIP – Carriage Insurance Paid To:
The seller selects the carrier and pays the freight for the transportation of the goods to the agreed destination. The seller will also take out the transport insurance. The transfer of costs takes place at the place of arrival.The risk of loss or damage shall pass to the buyer upon handover of the goods to the carrier. If successive carriers are used, the risk is transferred on handover to the first carrier.The CIP Incoterm differs from the CPT Incoterm in that the seller is obliged to take out “ad-valorem” insurance (minimum cover at the cost price of the goods). The seller must therefore cover the costs related to the insurance.
DAP – Delivered At Place:
Under the DAP Incoterm, the seller bears the transportation costs and the risk to the main port of arrival or to the delivery point agreed upon between the buyer and the seller.The responsibility, as well as the cost, will be taken over by the buyer at the unloading of the goods in the agreed place. The buyer is responsible for arranging the unloading, import formalities, and paying the related duties and taxes.
DDP – Delivered Duty Paid :
The DDP Incoterm is the most binding Incoterm for the seller. The seller bears the risk and the costs until the goods are delivered to the buyer.The seller will have to pay the transport costs, import duties, and taxes related to the operation. He will also have to take care of the customs formalities.
Incoterms – Maritime
The maritime and river Incoterms are only used when the pick-up points and delivery terminals are ports. They can also be used by importers and exporters when the goods are handed over to the shipping company that handles the freight. This is known as an alongside or on-board delivery.
There are 4 Incoterms specifically for ocean transport:
FAS – Free Alongside Ship:
The maritime Incoterm FAS obliges the seller to pay the transport costs and the assumption of the risks until the port of embarkation as well as to carry out the formalities related to the export of the goods: payment of the expenses, rights, and taxes related to these formalities).The goods shall be delivered alongside the ship in the port designated by the buyer upstream. The buyer will be transferred the costs, formalities, and risks on this occasion.
FOB – Free on Board:
The Incoterm FOB is one of the most widely used Incoterms for ocean transport.The seller is obliged to clear the goods at the port of departure and to deliver the goods to the vessel designated by the buyer. The transfer of charges and risks is done when the goods are loaded on the ship.At the time of loading, it is the buyer who takes responsibility for the goods as well as for the formalities and costs related to the operation.
CFR – Cost and Freight:
For the CFR Incoterm, the seller is responsible for the costs, formalities, and risks up to the main port of destination. Up to this terminal, the seller will have to take care of and pay for the formalities as well as the costs related to the transport.The transfer of costs takes place as soon as the goods arrive at the port of destination. He will have to pay the export clearance charges.The transfer of responsibility will take place when the goods are loaded at the port of departure. It is up to the buyer to take out transport insurance as soon as the goods are loaded at the port of departure.
CIF – Cost, Insurance, and Freight:
The CIF Incoterm is very similar to the CFR Incoterm. The only difference is that the seller is no longer responsible for the goods during transport, but must still take out insurance on behalf of the buyer.The transfer of the expenses is also done with the port of destination and the transfer of the risks with the port of departure.
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