If you are interested in international trade, learning about the world of INCOTERMS is essential, especially before planning an international transport of goods. You should clarify something in the first place, when exactly are the risks and costs transferred from the seller to the buyer?

INCOTERMS: WHAT ARE THEY?

INCOTERMS, approved by international standards and by customs authorities from all over the world, are international trade terms that clearly define and split rights, obligations, expenses and risks of international transport and insurance between the exporter and the importer.

They were first published in 1936 by the International Chamber of Commerce (ICC), aiming at adapting them to the recent international trade practices, many of which have been updated, until today’s “INCOTERMS 2016”.

HOW MANY ARE THERE?

In the next table we split into 4 different categories:

  • E(exit) → exit. The seller delivers the cargo when they make it available to the buyer in the buyer’s premises.

EXW

Ex works
  • F(free)→The seller is required to deliver the cargo to a transport company appointed by the seller.

FCA

Free carrier

FAS

Free alongside the ship

FOB

Free on board
  • C(cost) →The seller has a transport contract, without assuming any loss or damage risks or additional costs after the boarding.

CFR

Cost and freight

CPT

Carried paid to

CIF

Cost, insurance and freight

CIP

Carriage and insurance paid to
  • D(Delivered) →The seller is required to assume all costs and risks necessary to deliver the cargo at the destination place.

DAT

Delivered at terminal

DAP

Delivered at place

DDP

Delivered, duty paid

But despite being split into categories, each of them operates in a different way. I have chosen this video that helped MaDI students understand them and I believe you will also find it very useful! Start watching from 2:50.

We can also group them in terms of the means of transport used:

All means of transport EXW, FCA, CPT, CIP,DAT,DAP,DDP
Fluvial or maritime transport FAS, FOB, CFR, CIF

 

Lastly, it is fundamental to clarify the difference between direct delivery during exit and sale upon exit. On the one hand, direct delivery upon exit means that the cargo travels on behalf of the buyer and under their responsibility, from the very moment when they collect it from the seller’s premises (EXW) or from the moment when they collect it from the transport company (FCA, FAS, FOB, CFR, CIF, CPT y CIP). On the other hand, the sale upon exit means that the cargo travels on behalf of the buyer and under their responsibility.

¿HOW ARE THEY USED?

In order to use them, it is advisable to state in the sales contract which of them is going to be used. The choice is part of the trading negotiation, and needs to adapt both to the cargo and to the means of transport that is going to be used.

Besides this, the parties need to accurately state the place or the port. However, with certain Incoterms such as CPT, CIP, CFR or CIF, the designated place is not the same as the delivery place: it only refers to the place up to which the transport has been paid. In order to state the final destination of the cargo and avoid any kind of ambiguity, it is recommendable to mention the specific place. The same happens in the case of “Ex Works”: is it a factory/plant located in Belgium or built abroad by a Belgian brand?

As far as the rules to which contracts are subject, parties have three possibilities: Choosing the laws of the exporting country, choosing the laws of the importing country or choosing the laws of a third country. This last choice allows to neutralise the legal nationalism. On many occasions, this decision is made based on trading purposes, commitment or ease (in case that the tribunal is located in that third country).

For example, Swiss laws are recommended because they tend to favour the exporter and mainly because Switzerland is a neutral state, which is an advantage for the parties during trading negotiations.

If you still have doubts or want to find out more about the INCOTERMS world, visit the following website Santander TradePortal.