Freight Incoterms 2024 – All you need to know

Freight Incoterms 2024 – All you need to know

September 5, 2024
Freight Incoterms refers to the internationally recognized set of rules established to define the responsibilities of buyers and sellers in global trade.
These terms are used worldwide to set clear guidelines for international transactions, ensuring both parties understand their obligations.
The purpose of Freight Incoterms is to create a global standard for sales conditions, including the distribution of costs, risks, and responsibilities between the buyer and the supplier.

By using Freight Incoterms, businesses can minimize misunderstandings and disputes, making cross-border trade more efficient and transparent.

These terms help determine who is responsible for shipping, insurance, customs clearance, and other critical elements of the transaction, ensuring smooth operations throughout the shipping process.

What organization determines freight incoterms?

The organization responsible for determining and maintaining Incoterms is the International Chamber of Commerce (ICC).

Established in 1919, the ICC plays a pivotal role in promoting international trade and commerce by setting global standards and providing guidance for trade practices.

Incoterms, short for International Commercial Terms, were first introduced by the ICC in 1936 and have since been regularly updated to reflect changes in global trade dynamics.

Incoterms define the responsibilities of buyers and sellers in international transactions, specifying the point at which risks, costs, and obligations shift from the seller to the buyer.

These terms help avoid misunderstandings by providing clear guidelines on who is responsible for transportation, insurance, duties, and customs clearance.

Used globally, Incoterms facilitate smoother trade processes and promote transparency in cross-border dealings.

By offering these standardized terms, the ICC ensures that international trade is conducted efficiently and with minimal disputes, benefiting businesses worldwide.

Air Freight Incoterms

Air Freight Incoterms define the responsibilities of buyers and sellers in air shipping.

They clarify who handles transportation costs, insurance, and risks.

Common terms like EXW, FCA, CPT, and CIP outline when responsibilities transfer from seller to buyer, ensuring smooth international air freight transactions.

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 the EXW (Ex Works) rule, the seller delivers the goods to the buyer at a location chosen by the buyer, such as the seller’s factory or warehouse. The seller is not obligated to load the goods, and delivery is considered complete once the seller informs the buyer that the goods have been identified and set aside for collection.

Additionally, the seller is not responsible for preparing export documents or handling customs clearance in the country of origin. According to the EXW incoterm 2020, once the seller makes the goods available, all risks and costs transfer to the buyer.

In this arrangement, the buyer assumes full responsibility for everything, including customs clearance in both the origin and destination countries, freight costs, loading, and delivering the goods to their final destination. The EXW term places the maximum burden on the buyer, who must manage all aspects of transportation and documentation beyond the seller’s premises.

Free Alongside Ship (FAS) – Freight incoterms rules

Under the FAS (Free Alongside Ship) rule, the seller is responsible for the goods until they are placed alongside the ship at the agreed port of shipment.

The seller is also required to complete the export formalities and provide proof of delivery. However, the seller will not deliver the goods if the ship is unavailable for loading.

Once the goods are delivered alongside the ship, all remaining costs and responsibilities, including loading, risks, and any potential damages, are transferred to the buyer.

Although the FAS rule is less commonly used today, it remains a practical option for shipping heavy machinery, where specific handling and loading requirements are necessary.

Free Carrier (FCA) – Freight incoterms rules

The seller is responsible for delivering the goods to the buyer or their designated freight forwarder, while also providing the required export documents and covering any related fees.

Once the goods are handed over, the buyer assumes responsibility for all additional costs, including freight, import documentation, and any further obligations.

This approach works well for both domestic and international transactions, offering flexibility and clarity in the division of responsibilities between the buyer and seller.

Free on Board (FOB) – Freight incoterms rules

The FOB (Free on Board) Incoterm is one of the most widely used terms in international trade.

Under FOB, the seller is responsible for loading the goods onto the vessel selected by the buyer and handling the export documents and customs clearance at the origin.

The buyer, on the other hand, must secure the shipping space and is responsible for all costs and risks once the goods are on board. This includes freight, delivery, import customs clearance, and any associated charges.

FOB is not suitable for air freight or less-than-container load (LCL) shipments. One key advantage for the buyer is greater control over shipping costs, allowing them to manage expenses according to their budget.

Carriage Paid To (CPT) –  Freight incoterms rules

Under the CPT (Carriage Paid To) Incoterm, the seller is responsible for arranging export licenses and delivering the goods to their chosen freight forwarder.

Once the seller hands over the goods to the freight forwarder, all costs and responsibilities shift to the buyer.

The buyer is then responsible for transportation, customs clearance at the destination, and any other associated costs.

It’s important to note that under CPT, neither the seller nor the buyer is required to arrange insurance for the goods. However, either party may choose to do so at their own discretion.

This rule provides a clear division of duties, making it easier for both parties to understand their obligations in the shipping process.

Carriage and Insurance Paid To (CIP) – Freight incoterms rules

Under the CIP (Carriage and Insurance Paid To) Incoterm, the seller is responsible for delivering the goods and covering transportation costs and insurance until they are handed over to the buyer’s freight forwarder.

The seller must also arrange maximum insurance coverage for the goods, ensuring protection during transit. Additionally, the seller is responsible for export customs clearance and proper packaging.

Once the goods are handed over, the buyer takes on the remaining responsibilities, including the main freight, import customs clearance, and any other associated costs.

This rule offers a clear division of duties, with the seller covering more initial costs and insurance, while the buyer manages the final leg of the shipping process.

The CIP term is widely used for international shipments where both parties want a balanced sharing of risk and cost.

Cost and Freight (CFR) – freight incoterms rules

Under the CFR (Cost and Freight) rule, the seller is responsible for placing the goods on board the vessel they have arranged.

The seller covers the freight costs, export licenses, loading fees, and any security costs related to the transport.

However, it’s important that both the buyer and seller agree on who will cover the unloading costs once the goods arrive at the destination.

While the seller handles the shipping up to this point, all further costs and responsibilities shift to the buyer once the goods are on board the vessel.

CFR is typically used for full container load (FCL) shipments but is not suitable for air freight or less-than-container load (LCL) shipments.

This rule is beneficial when clear terms for sea freight are established, ensuring that both parties understand their roles in the transaction.

Cost, Insurance and Freight (CIF) – Freight incoterms rules

Under the CIF  Incoterm , the seller is responsible for arranging insurance, packaging, freight forwarding, and export licenses.

The seller must also handle the goods and bear the risk of any damages until they are loaded onto the ship. The required insurance must cover at least 110% of the invoice value, ensuring adequate protection during transit.

However, it’s important to note that some countries do not allow imports under CIF, as the buyer may be required to use a local insurer for coverage.

CIF is most suitable for bulk and break bulk cargo, but it is not ideal for containerized freight.

This rule is commonly used for sea shipments where the seller manages most of the initial steps, but the buyer assumes responsibility once the goods are on board the ship.

Delivered at Place Unloaded (DPU) – New freight incoterms 2020

This 2020 Incoterm introduces new responsibilities for the seller.

Under this rule, the seller is responsible for covering the main freight costs, securing export licenses, and handling the unloading of goods in the destination country.

Once the goods are unloaded, the remaining costs and responsibilities, such as customs clearance, import duties, and further transportation, are transferred to the buyer.

This Incoterm provides a clear division of tasks, ensuring both parties know their obligations during the shipping process.

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.

Incoterms 2020

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.

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