Incoterms is a terms for International Commercial Terms. They are used by buyers and sellers around the world to determine the rules of international transactions. In this regard, the freight incoterms purpose is to set a global standard for sales conditions, risks and responsibilities of the buyer and supplier.
What has the Chamber of Commerce done to facilitate international trade?
What are the 12 types of incoterms?
How can Topshipping help you?
What is the Ex Works incoterm?
What is FOB incoterm rule?
Why do some countries not allow the use of CIF incoterm?
What is the new freight incoterms 2020?
Why pay attention to the destination country in using DDP rule?
How you can use the freight incoterms?
What are the new update changes?
What organization determines freight incoterms?
The International Chamber of Commerce was established in 1919 to facilitate international trade. As a result, ICC first published the freight incoterms in 1936. It also updates them whenever necessary. For example, they last updated it in 2020 and before that in 2010.
The freight incoterms rules in simple language
There are 12 types of freight incoterms, and each sets different terms and responsibilities. Be sure that you choose the best with awareness for your freight forwarding because it is very effective in your costs. Also, if you get help from a freight forwarder company, you will not face unpredictable losses in your process.
Also, these 12 are a collection of three-letter terms that have a very precise meaning:
Ex Works (EXW) – Freight incoterms rules
Under EXW rule, the seller should delivers the goods to the buyer at any place she/he chooses such as seller factory or warehouse. Also, he/she does not have the duty to load the goods. As a result, the delivery is done from the moment the seller announces that she/he has identified the goods and set them aside. Also, the seller is not responsible for preparing export documents and customs works of the origin country.
In EXW incoterm 2020, from the moment the seller delivers the goods to the buyer, the buyer is responsible for all risks and its fees. In this rule, the buyer is responsible for everything: Customs clearance of origin and destination countries, freight cost, loading and delivery to destination country, etc.
Free Alongside Ship (FAS) – Freight incoterms rules
According to FAS rule, the seller is responsible for the goods up to alongside the ship. He/She must carry out export formalities and the proof of delivery. The seller will not deliver the goods as long as the ship is not available.
The rest of the costs are borne by the buyer. She/He is also responsible for the loading, risks and damages as soon as the goods are delivered.
These days, they rarely use it. But it is still suitable for shipments of heavy machinery.
Free Carrier (FCA) – Freight incoterms rules
The seller delivers the goods to the buyer or her/his freight forwarder company. He/She must also provide export documents and is required to pay a fee.
Freight costs, import paper works and other responsibilities are with the buyer.
Also it suitable for domestic and international transactions.
Free on Board (FOB) – Freight incoterms rules
FOB incoterm rule is one of the most popular.
The seller places the goods on the ship chosen by the buyer. Also, the costs and responsibility of export documents and customs paper works are on him/her. The buyer must conclude a contract for the ship’s space and the seller must load the goods. As a result, other costs, such as freight, delivery, customs clearance and import costs are with the buyer.
It is not suitable for air freight or LCL. The advantage of FOB incoterm for the buyer is that she/he controls the expenses according to her/his budget.
Carriage Paid To (CPT) – Freight incoterms rules
Under the CPT incoterm, the seller is responsible for export licences. Also she/he must deliver the goods to her/ his freight forwarder company. As soon as the seller delivers the goods, all responsibilities and costs are borne by the buyer.
Also both parties have no liability for insurance.
Carriage and Insurance Paid To (CIP) – Freight incoterms rules
In CIP rule, the seller is responsible for delivery, its costs and insurance of the goods until it is transferred to the buyer freight forwarder company. In this incoterm, the seller must insure the goods with maximum coverage. She/He is also in charge of export, customs clearance and packaging.
The buyer bears the rest of the responsibilities and costs such as main freight, customs clearance, imports, etc.
Cost and Freight (CFR) – freight incoterms rules
CFR rule requires the seller to place the goods on board the vessel contracted by themselves.In this regard, freight costs and export licenses are the responsibility of him/her. The seller must pay the costs of loading the goods on board the vessel, the freight costs and any transport-related security costs.
Here, the two parties to the contract must specify who will pay for the unloading.
However, it is suitable for FCL but not for air freight and LCL.
Cost, Insurance and Freight (CIF) – Freight incoterms rules
Here, the seller is responsible for arranging insurance, packaging, original freight forwarding and export licenses. He/She is also responsible for the goods and damages until they are loaded on the ship. The amount of insurance required must be at least 110% of the invoice value.
Note that some countries do not allow imports under CIF incoterm. Because the buyer must use an internal insurer to insure the goods.
It is suitable for bulk and break bulk cargo but not for containerized freight.
Delivered at Place Unloaded (DPU) – New freight incoterms 2020
This is a new rule for 2020. According to this incoterm, the seller pays for the main freight forwarding, the export licenses and the unloading in the destination country. As a result, the rest of the costs and responsibilities are with the buyer.
Delivered at Place (DAP) – freight incoterms rules
This is the new name of DDU rule. In DAP, the seller is responsible for the entire freight forwarding and delivers the goods to the buyer where specified. The buyer is only responsible for customs clearance, import documents and payment of duties and taxes.
If the destination country is a landlocked and the goods are transit by sea, they must first go to the port of the neighboring country and then be transported to the destination. In this case, all costs are borne by the seller.
Delivery Duty Paid (DDP) – Freight incoterms rules
In DDP incoterm, the seller has the most responsibility. She/He is responsible for all costs, such as main freight, customs clearance, import and export, duties and taxes, and delivery. The buyer has only the task of unloading the cargo at the destination.
In this rule, you must pay attention to the destination country. Because in the law of some countries for the customs clearance, the importer must be an entity registered in the destination country. In this case, you have to agree in the contract that the buyer will import the goods. Or use DAP term instead.
Be aware that CIF, FOB, FAS and CFR freight incoterms apply to sea freight. But the rest of them apply to all methods of freight forwarding such as air freight.
A few reminders and tricks
Note in these rules that:
- As soon as the buyer receives the goods, all the risks and dangers of damage to the goods are transferred from the seller to the buyer.
- If the seller prepares the goods for delivery according to the specified time and the buyer delays in receiving, the buyer runs the risk of its damaging.
Moreover, the freight incoterms do not cover:
- Property rights
- Possible force majeure situations
- Breach of contract
So be sure to specify these issues in your contract.
Also, they do not specify the responsibility for regulating insurance, except in C terms.
You should not consider freight incoterms as a complete contract for sale. As a result, you should explicitly state other things in your contracts.
To use them, you must follow this structure:
[The chosen incoterm rule] [Named port, place or point] Incoterms 2020. In this regard, if you enter another year, like 1990, the law of that year applies to you.
Also, it can cost you dearly if you make the wrong choice. So you can get help from Topshipping. We will choose the best one for you, knowing the details of each term and evaluating your freight process.
Be aware of these changes if you want to use the latest update 2020:
In DPU incoterm, delivery conditions have changed. Accordingly, delivery of goods is possible anywhere and is not limited to the terminal.
CIF and CIP freight incoterms have some new insurance terms. Thus, they require an insurance with the minimum cover of the Institute Cargo Clause (C) and (A).
Also in FCA terms, the buyer can ask the freight forwarder company or its agent to issue a Bill of Lading with a (on board) sign, for the supplier.