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The Incoterms or International Commercial Terms are a series of pre-defined commercial terms published by the International Chamber of Commerce (ICC) relating to international commercial law. They are widely used in international commercial transactions or procurement processes and their use is encouraged by trade councils, courts and international lawyers. A series of three-letter trade terms related to common contractual sales practices, the Incoterms rules are intended primarily to clearly communicate the tasks, costs, and risks associated with the global or international transportation and delivery of goods. Incoterms inform sales contracts defining respective obligations, costs, and risks involved in the delivery of goods from the seller to the buyer, but they do not themselves conclude a contract, determine the price payable, currency or credit terms, govern contract law or define where title to goods transfers.

The Incoterms rules are accepted by governments, legal authorities, and practitioners worldwide for the interpretation of most commonly used terms in international trade. They are intended to reduce or remove altogether uncertainties arising from different interpretation of the rules in different countries. As such they are regularly incorporated into sales contracts worldwide.

"Incoterms" is a registered trademark of the ICC.

The first work published by the ICC on international trade terms was issued in 1923, with the first edition known as Incoterms published in 1936. The Incoterms rules were amended in 1953,[3] 1967, 1976, 1980, 1990, and 2000, with the eighth version — Incoterms 2010 — having been published on January 1, 2011. The ICC has begun consultations on a new revision of Incoterms, to be called Incoterms 2020.

Types of Incoterms

There are currently 11 incoterms in use. Their commonality in trading contracts makes it important for you to understand what they mean and the responsibilities of the various involved parties.

1. CIF (Cost, Insurance and Freight)

CIF means that the seller delivers when the suitably packaged goods, cleared for export, are safely stowed on board the ship at the selected port of shipment. The seller must prepay the freight contract and insurance.

Despite the seller paying for the freight contract to the selected destination port, once the goods are safely stowed on board, responsibility for them transfers to the buyer.

The seller is only obliged to procure the minimum level of insurance coverage. This minimum level of coverage is not usually adequate for manufactured goods. In this event, the buyer and seller are at liberty to negotiate a higher level of coverage.

2. CIP (Carriage and Insurance Paid to)

CIP means that the seller delivers the goods to a carrier or another approved person (selected by the seller) at an agreed location.

The seller is responsible for paying the freight and insurance charges, which are required to transport the goods to the selected destination. CIP states that, even though the seller is responsible for freight and insurance, the risk of damage or loss of the transported goods transfers from the seller to the buyer the moment the carrier receives the goods.

The seller is only obliged to procure the minimum level of insurance coverage. Should the buyer want additional insurance, they are responsible for arranging it themselves.

3. CFR (Cost and Freight)

CFR means that the seller delivers when the suitably packaged goods, cleared for export, are safely loaded on the ship at the agreed upon shipping port.

The seller is responsible for pre-paying the freight contract. Once the goods are safely stowed on board, responsibility for them transfers to the buyer, despite the seller paying for the freight contract to the selected destination port. The buyer must be informed of the delivery arrangements with enough time to organise insurance.

4. CPT (Carriage paid to)

CPT stands for when the seller delivers the goods to a carrier, or a person nominated by the seller, at a destination jointly agreed upon by the seller and buyer. The seller is responsible for paying the freight charges to transport the goods to the named location. Responsibility for the goods being transported transfers from the seller to the buyer the moment the goods are delivered to the carrier.

If multiple carriers are used, risk passes as soon as the goods are delivered to the first carrier. The seller’s only responsibility is to arrange freight to the destination. They are not responsible for insuring the goods shipment as it is being transported.

The seller should ensure that they make it clear on their quotation that their responsibility for the goods ends at loading and, from this point forward, the buyer should arrange appropriate insurance.

5. DAT (Delivered at Terminal)

DAT is a term indicating that the seller delivers when the goods are unloaded at the destination terminal.

‘Terminal’ can refer to a container yard, quayside, warehouse or another part of the cargo terminal. The terminal should be agreed upon accurately in advance to ensure no confusion over the location.

While there is no requirement for insurance, the delivery is not complete until the goods are unloaded at the agreed destination. Therefore, the seller should be wary of the risks that not securing insurance could pose.

6. DAP (Delivered at Place)

DAP means that the seller delivers the goods when they arrive at the pre-agreed destination, ready for unloading.

It is the buyer’s responsibility to effect any customs clearance and pay any import duties or taxes. Additionally, while there is no requirement for insurance, the delivery is not complete until the goods are unloaded at the agreed destination. Therefore, the seller should be wary of the risks of not securing insurance.

7. DDP (Delivery Duty Paid)

DDP means that the seller delivers the goods to the buyer, cleared for import and ready for unloading, at the agreed location or destination. The seller maintains responsibility for all the costs and risks involved in delivering the goods to the location. Where applicable,  this includes pre-shipment inspection costs and import ‘duty’ for the country of destination. Import duty may involve customs formalities, the payment of these formalities, customs duties and taxes.

DDP holds the maximum obligation for the seller. While there is no requirement for insurance, the delivery is not complete until the goods have been unloaded at the destination. Therefore, the seller should be wary of the risks that not securing insurance could pose.

8. EXW (Ex Works)

EXW means that the seller has delivered when they place or deliver suitably packaged goods at the disposal of the buyer at an agreed-upon place (i.e. the works, factory, warehouse, etc.). The goods are not cleared for export.

The seller is not required to load the goods onto a collecting vehicle and, if they do, it is at the buyer’s expense. EXW is the only Incoterm where the goods are not required to be cleared for export, although the seller has the duty to assist the buyer (at the buyer’s expense) with any needed documentation and export approvals.

After collection, the buyer must provide the seller with proof that they collected the goods. From collection, the buyer is responsible for all risks, costs and clearances.

9. FAS (Free Alongside Ship)

FAS stands for when the seller delivers the goods, packaged suitably and cleared for export, by placing them beside the vessel at the agreed upon port of shipment. At this point, responsibility for the goods passes from the seller to the buyer. The buyer maintains responsibility for loading the goods and any further costs.

The seller may procure a freight contract at the buyer’s request or, if the buyer fails to procure one by the date of a scheduled delivery, the seller may procure one on their own initiative. The buyer is responsible for the cost and risk associated with the freight contract.

10. FCA (Free Carrier)

FCA means that the seller fulfils their obligation to deliver when the goods are handed, suitably packaged and cleared for export, to the carrier, an approved person selected by the buyer, or the buyer at a place named by the buyer. Responsibility for the goods passes from seller to buyer at this named place.

The named place may be the seller’s premises. While the seller is responsible for loading the goods, they have no responsibility for unloading them if the goods are delivered to a named place that is not the seller’s premises.

The seller may procure a freight contract at the buyer’s request or, if the buyer fails to procure one by the date of a scheduled delivery, the seller may procure one on their own initiative. The costs and risks of this freight contract fall on the buyer. The buyer must be informed of delivery arrangements by the seller in time for the buyer to arrange insurance.

11. FOB (Free on Board)

FOB means that the seller delivers the goods, suitably packaged and cleared for export, once they are safely loaded on the ship at the agreed upon shipping port. At this point, responsibility for the goods transfers to the buyer. The seller may procure a freight contract at the buyer’s request or, if the buyer has failed to procure one by the date of a scheduled delivery, the seller may procure one on their own initiative. The buyer is responsible for the cost and risk of this freight contract.

The seller must inform the buyer of delivery arrangements in good time to sort out insurance for the shipment.

FOB is a frequently misused term. If a supplier insists FOB needs to be used for containerised goods, the buyer should make certain that the selected insurance covers the goods ‘warehouse to warehouse’.