International Commercial Terms
(INCOTERMS)
PNPLINE is more than an order fulfillment business.
We supply global logistics at an affordable and competitive price point.
With freight forwarding and customs clearance services under our belt.
Know your incoterms with our assistance.
What are INCOTERMS?
Incoterms, International Commercial Terms are a set of 11 rules used by importers and exporters, which is maintained by the International Chamber of Commerce. Updated roughly every 10 years. These rules cut through the confusion of who is responsible for what. Most importantly, these rules are globally recognized. Providing clear guidelines, and practices. But, to be clear, these rules are specific to only part of the overall international export contracts. For the sake of mitigating litigation and disputes due to misunderstandings. INCOTERMS specifies which party is responsible for logistical activities, these activities include, but are not limited to who pays for and manages the shipments, insurance, documentation, and customs clearance.
Table of Contents
CPT - Carriage Paid to
In a nutshell, the seller has to provide transportation, however, the seller is only responsible for any damages from when the first carrier receives the goods, even though there are multiple touch points before delivery. For example, there are two carrier transfers before delivery. Let’s say that one of them is land and the other is air. After the seller hands the goods to the truck driver, all responsibilities and risks are transferred to the buyer. This is especially risky to the buyer when the seller tries to find the cheapest way of delivery. Without any insurance, the buyer is at risk if the goods are damage during travel.
What doesn't INCOTERMS COVER?
As mentioned above, INCOTERMS do not cover every aspect of international trade. It only covers the sales sections in the export contract.
INCOTERMS DO NOT:
- Address all the conditions of a sale
- Identify the items nor the contracted price of goods being sold.
- State the method nor timeframe of negotiated payments between parties.
- State when the ownership of goods are transferred from the seller to the buyer.
- Define which documents are required by the seller to the buyer for processing the customs clearance at the buyers’ country.
- Provide standard punitive or other consequences for failure to provide the goods in accordance to the contract of sale.
- These may include:
- Delayed delivery
- Dispute settlement mechanism
- These may include:
What are these INCOTERM rules?
These rules are split up into two main segments. Any Mode of Transportation, and Sea & Waterway Transportation. We will go over the basics of these.
EXW - Ex Works
In Ex Works, the buyer takes all the risk and costs associated with the goods being sold. This begins immediately after the goods are available to pick up by the seller. The specifics of where, how, and when, will be agreed upon by both parties. This could be the factory, warehouse, or anywhere the goods will be exchanged. The key importance in EXW to note is that the seller completes its obligations when they have the goods available for the buyer to pickup. With instructions of how to pick the goods up. The seller has no obligations to load or clear them for export. However, this does not mean that the seller is done. Even under Ex Works, the seller is required to provide the relevant information to the buyer’s freight forwarder or authorized party delighted to submit electronic export information through AESDirect.
Although, Ex Works is the only INCOTERM that makes the buyer responsible for export clearance, the seller isn’t free of their responsibilities for export compliances. For example, the U.S. Export Administration Regulations, and the Foreign Trade Regulations still require export compliances from sellers.
FCA - Free Carrier
Unlike EXW, in FCA the risks are spread out, up until the seller transfers the said goods to an agreed upon destination or handed off to a person who will take care of the goods for the buyer. Frequently, these agreed upon destinations are, airport, shipping terminal, warehouse, the seller’s business location, or other location where the carrier operates. Note, the seller will usually include the transportation costs in the end price. Which makes sense since, the seller will be liable for the goods until the carriers receive the goods, transferring all responsibilities to the buyer.
CIP - Carriage and Insurance Paid To
Carriage and insurance paid to, is when a seller pays for the freight and insurance. However, the responsibility is transferred from the seller to the buyer as soon as it is delivered to the carrier or person in charge. In which the seller is required to insure 110% of the contract during transit.
DAP - Delivered at Place
In the case of Delivered at place or DAP for short, the seller will take full responsibility of any loss incurred when delivering the contracted goods. While, the buyer is responsible for paying for paying import duties and any taxes incurred, including but not limited to clearance and local taxes, once the shipment has arrived at the specified destination.
DPU - Delivered at Place Unloaded
In the case of Delivered at Place Unloaded, the seller takes all the risk all the way up until the seller unloads the goods at the agreed location. This involves any form of transportation and any number touch points. On the other hand the buyer is responsible for all import customs formalities, such as, Commercial Invoice, Packing List, Bill of Lading (BOL), and, the Arrival Notice.
DDP - Delivered Duty Paid
In the case of Delivered duty paid (DDP), the seller is responsible for all fees, taxes, and transportation modes and touch points up until unloading. This includes import customs. This might be very risky for the seller since in many countries the import clearance procedures are complex and bureaucratic.
FAS - Free Alongside Ship
In the case of Free Alongside Ship the seller is only responsibility is to deliver the goods to the shipping vessel. As this rule is only for sea or inland waterway. On the other hand, the responsibility is passed to the buyer. Specifically, loading the goods and all costs thereafter.
FOB - Free on Board
In the case of Free On Board, the seller will deliver and load the goods onto the vessel. All other responsibilities will be passed to the buyer thereafter.
CFR - Cost and Freight
In the case of Cost and Freight, the seller pays for all costs involving delivery and transportation, but after the goods are loaded onto the vessel, all risk is transferred to the buyer.
CIF - Cost Insurance and Freight
In the case of Cost Insurance and Freight, the seller is responsible for paying, loading, and delivering the goods to the buyer, including (minimal cost) insurance. Which is not very practical for commercial contracts. Which all the risks are passed onto the buyer after the goods have been loaded onto the vessel.
