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Shipping terms, also called INCOTERMS, are pre-defined commercial terms that are used in international commercial transactions or procurements. Shipping terms are made out of a series of three letters, and they clearly communicate the tasks, risks, and costs associated with international transportation and delivery of goods.
INCOTERMS are accepted by governments, legal authorities, and private entities around the world. They reduce or remove the uncertainties arising from different interpretations of transport and property laws in different countries, so they are commonly incorporated into sales contracts.
Even though INCOTERMS can define the obligations, risks, and costs of a sales contract, they do not conclude a contract, determine the transaction’s price, or govern contract law.
Let’s take a look at some of the most common INCOTERMS used in global shipping and see what they communicate.
Incoterms define ownership, delivery and risk. Ownership is transferred according to the clauses defined in the contract. As a result, ownership may begin during the manufacturing process or it may transfer after the delivery.
The place and time of transfer are specified in INCOTERMS and they define the delivery of goods and transfer of risk. Since only the titleholder can make a claim for loss or damages, it’s extremely important to know who is responsible for the goods at any given time, which is why international contracts use the following INCOTERMS.
This INCOTERM communicates that the seller delivers the goods at a named place and clears the transport for export. The goods may be delivered to a carrier designated by the buyer or to any other party designated by the buyer.
The chosen place of delivery may affect the loading and unloading obligations that take place at the destination. If the delivery is done at the seller’s premises or at a location under the seller’s control, the seller is responsible for loading the goods.
However, if the delivery takes place at any other location, it’s considered that the seller delivered the goods once the transport arrived at the location and the buyer is responsible for unloading the goods from the seller’s transport and loading them onto their own transport.
This INCOTERM communicates that the buyer is responsible for the risks until the goods reach their final destination. The seller doesn’t have to load the goods on the transport and they don’t have to clear the goods for export.
The goods are made available at the seller’s premises or at any other named location. EXW places the maximum obligation on the buyer and minimizes the seller’s obligations. The term is commonly used when making initial quotations for sale of goods.
In common practice, EXW is used to make the buyer responsible for clearing the goods through Customs.
This INCOTERM communicates that the seller is responsible for delivering the goods to the agreed place of destination. The seller handles the costs of transportation and the export clearance.
In common practice, CPT is used when the seller hands over the goods to the main carrier, at which point the risks are transferred over to the carrier.
This INCOTERM is similar to the CPT term, with the notable exception that the seller has to insure the goods while in transport. Under CIP, the seller is required to insure the merchandise for 110% of the contract value, in the same currency as the contract.
This INCOTERM communicates that the seller is responsible for delivering the goods and unloading them at a named terminal. The seller covers the costs of transport, including export fees, carriage, port charges, unloading at destination. The seller also assumes all the risk until the goods are unloaded at the named terminal.
The buyer is responsible for handling the costs and risks after the goods are unloaded, including taxes, import duty, customs, etc.
This INCOTERM communicates that the seller is responsible for delivering the goods at the point of destination. The seller carries the costs and risks for packing the goods, transporting them to the destination, handling the necessary legal formalities and clearing the goods for export in the exporting country.
The buyer is responsible for the customs clearance in the importing country, and they are also responsible for unloading the goods at the final destination.
This INCOTERM communicates that the seller is responsible for delivering the goods to a mentioned location. The seller carries the costs and risks for bringing the goods to the location, including handling the paperwork, import duties, taxes, etc.
The risk is transferred to the buyer once the goods arrive at the mentioned location, where the buyer is responsible for the unloading.
This INCOTERM is used for sea and inland waterway transport, only for non-containerized sea freight. FAS is used when the seller places the goods alongside the buyer’s vessel at a named port. The seller’s delivery is considered completed and the risks and responsibilities transfer to the buyer from that point forward.
Under FAS, the seller is responsible for clearing the goods for export. If contractually agreed upon by both parties, the buyer can become responsible for the export clearance.
This INCOTERM is used for sea and inland waterway transport, only for non-containerized sea freight. It communicates that the seller is responsible for all the costs and risks until the goods are transferred onto the buyer’s vessel. The seller clears the goods for export.
The buyer is responsible for the marine freight transportation, landing fees, insurance, unloading, etc.
This INCOTERM is used for sea and inland waterway transport, only for non-containerized sea freight. It communicates that the seller is responsible for the costs and risks of transporting the goods to the agreed port of destination.
The risks and responsibilities transfer to the buyer when the goods have been loaded on a ship in the exporting country. The shipper has to clear the goods for export and supports the costs for carriage up to the named port. The shipper is not responsible for delivering the goods from the port to the buyer’s facilities or for insuring the goods.
This INCOTERM is used for sea and inland waterway transport, only for non-containerized sea freight. It’s similar to the CFR INCOTERM, with the exception that the seller has to insure the goods for 110% of their value while in transit. The insurance should be closed in the same currency as the contract.
The CIF INCOTERM should be used only for non-containerized sea freight because all the other modes of transportation should use the CIP INTERCOM instead.
