Logistics has its own language, and international trade is one of its major dialects. In that context, Incoterms are an important mode for communication among trading partners.
The 13 terms are widely used but often misunderstood. One reason is that, to the casual listener, they often sound like terms used in domestic transportation. Unlike their domestic counterparts, Incoterms do not convey title to the goods, they are not a contract between two parties and, as such, they are not legally binding — you can't take anyone to court for not fulfilling the obligation of an Incoterm, says Adrienne Graddy, director of compliance solutions for BDP International. Incoterms do describe where the buyer's and the seller's responsibilities begin and end.
Graddy's warning that the terms themselves are not specific enough could also apply to any discussion of their use. To put some weight behind terms of sale, get them into the sales contract, purchase order or purchase contract, she suggests.
Established in 1936 by the International Chamber of Commerce, Incoterms are industry-defined standard trade definitions. They define who will take on various obligations or responsibilities in a trade transaction. This ranges from Ex-Works, which puts most of the responsibility in the hands of the buyer, to Delivered Duty Paid, which places the responsibility with the seller.
Given current concerns over the "chain of custody" and security of goods imported into the U.S., importers might consider taking more of the responsibility, suggests Graddy. That gives them the control over the supply chain and who will provide what service. Selecting providers can help ensure compliance with programs such as Customs-Trade Partnership Against Terrorism (C-TPAT), which will help speed the flow of imports through U.S. port security checks.
Here are the 13 Incoterms and some brief definitions:
EXW: Ex-Works — Seller places the goods at the disposal of the buyer at the seller's premises, not cleared for export. Buyer bears all costs and risks associated with transporting the goods to destination.
FCA: Free Carrier (named place) — Seller delivers goods, cleared for export, to the carrier at a named place. The risk of loss and damage to the goods is transferred from the seller to the buyer at that point. FCA is a multi-modal term; other terms may not apply to air shipments.
FAS: Free Alongside Ship — Seller clears goods for export and delivers them alongside the vessel at the named port. The buyer bears costs and risks of damage from that moment.
FOB: Free On Board — The buyer takes responsibility for costs and risks of loss or damage when the goods "pass the ship's rail" and are loaded onboard at the named port of shipment. Unlike its domestic counterpart term, it does not convey title to the goods.
CFR: Cost and Freight (named destination port) — Like FOB, cost and risk of loss or damage to goods passes to the buyer when the goods pass the ship's rail, but the seller pays costs and freight necessary to bring the goods to the named destination port.
CIF: Cost Insurance and Freight (named destination port) — Similar to CFR, but the seller bears the cost and responsibility for obtaining marine insurance against cargo loss or damage.
CPT: Carriage Paid To (named destination) — Seller delivers goods to carrier seller has selected and pays cost of carriage to the named port of destination.
CIP: Carriage and Insurance Paid (named place of destination) — The seller delivers the goods to a carrier selected by the seller and pays cost of carriage and insurance. Risk passes when goods are delivered to the first carrier. The term applies to any mode.
DAF: Delivered at Frontier — Seller delivers goods and places them at the disposal of the buyer on the means of transport, not unloaded. The seller clears goods for export, but not for import. The land frontier must be defined.
DES: Delivered Ex Ship — Goods are placed at the disposal of the buyer at the named port of destination onboard the ship, not cleared for import. Seller bears all costs and risks to bring the goods to the port.
DEQ: Delivered Ex-Quay — Similar to DES, but goods are placed at the disposal of the buyer on the quay or wharf at the named destination port. The buyer clears the goods for import and pays duties, taxes and other fees on import.
DDU: Delivered Duty Unpaid — Seller delivers goods not cleared for import and not unloaded from mode of transport at named destination. The term applies to any mode.
DDP: Delivered Duty Paid — The seller delivers goods to the buyer at a named destination, cleared for import but not unloaded. The seller bears all costs and risks to that point, including duties.
More information is available from: www.iccwbo.org/incoterms/id3045/index.html.