Scope and Limitations of Incoterms
Incoterms enjoy worldwide acceptance as a uniform set of rules defining the obligations of the parties to trade for transport, risks and costs associated with movement of the goods. While extensively used in purchase and sales contracts, Incoterms have their own limitations in application. The terms apply to the delivery of the goods only and do not govern other contractual rights and obligations between buyer and seller.
It is also good to know that Incoterms have nothing to do with the contract of carriage or forwarding agreement between the shipper and the carrier or the shipper and the forwarder. For instance, when you make a rate request for shipment from Singapore to Frankfurt under “CIP Frankfurt, you should know that your forwarder or the carrier will not provide cargo insurance for your goods just because the Incoterms CIP requires the goods to be insured by the shipper. This is because the carrier or the forwarder you may be using are not parties to the sales contract (between buyer and seller) which means Incoterms do not apply to them. The responsibilities of the carrier or the forwarder before the shipper or the consignee of the goods should be defined in the contract of carriage or forwarding agreement.
Incoterms 2020, which became effective on January 1, 2020, is the ninth set of the terms published by the ICC. As in the previous version, it contains 11 terms divided into two main categories: rules for omnimodal transport and marine only transport. It is good to remember that the publication of a new version of Incoterms does not mean you cannot use the previous versions. Important is that the parties to the contract agree to use the same set of the terms when making a contract.
Rules for Any Mode of Transport
EXW | Ex Works
Ex Works is used when the seller places the goods at the buyer’s disposal on its territory or at another location specified in the contract, such as a factory, warehouse, etc. The entire responsibility for transportation is on the buyer.
FCA | Free Carrier
The seller hands over the goods to the carrier or other designated person in the seller’s territory or at another contractual place. Responsibility for the goods passes to the buyer after the goods are delivered by the seller to the specified place.
CPT | Carriage Paid To
The seller hands over the goods to the carrier or to another person designated by the seller at an agreed place. The seller enters into a contract with the carrier and pays all transport costs necessary for the delivery of the goods to destination.
CIP | Carriage and Insurance Paid To
The seller has the same obligations as in the CPT, but additionally concludes a contract to insure the goods against the risks of loss and/or damage during carriage. Under CIP, cargo is normally insured with minimum coverage, unless otherwise agreed in the contract between seller and buyer.
DAP | Delivered at Place
In DAP delivery of the goods is completed by the seller to the specified destination and is at the buyer’s disposal after loading on the incoming vehicle. All potential risks and costs of transportation are borne by the seller.
DPU | Delivered at Place Unloaded
In DPU, the seller delivers when the goods after unloading are placed at the buyer’s disposal at the specified place of destination. Similarly to DAP, liability for risks and transportation costs rests with the seller.
DDP | Delivered Duty Paid
The seller delivers and hands over the goods to the buyer at a determined place and pays all export and import costs, as well as all necessary documents for customs procedures.
Rules for Sea and Inland Waterway Transport
FAS | Free Alongside Ship
The seller delivers the goods to the place specified by the buyer near the ship (for example, on a pier or barge) at the designated port of shipment. The risk of loss and/or damage to the goods, as well as all costs, passes to the buyer, from the time the goods are delivered to the place next to the ship.
FOB | Free On Board
The seller brings the goods on board the vessel at the designated port of shipment. The risk of loss and/or damage passes from the seller to the buyer when the goods have already been loaded on board the ship.
CFR | Cost and Freight
The seller brings the goods on board the vessel and is responsible for the risk of loss and/or damage to the goods before being brought on board. The seller must conclude the contract and pay the costs and freight necessary to deliver the goods to the port of destination.
CIF | Cost Insurance and Freight
As with the CFR, the seller alone brings the goods on board the ship, concludes the contract and pays the freight. In addition, the seller concludes a contract to insure the goods against the risk of loss and/or damage during carriage.
Our team at Delta Global Solutions is well versed in the ways international trade works. Beyond the standard freight forwarding services, we help our customers with their purchasing process, from drafting and legal scrutiny of sales contracts to global sourcing of commodities, materials and parts to support uninterrupted operations of our customers’ facilities.