Incoterms® are a very important consideration when trading on the global stage, probably more so than many exporting companies realise. Incoterms® are very often mis-used in international trade transactions. Devised by the International Chamber of Commerce, these globally recognised trade terms should always be incorporated in to export sales contracts to specify where responsibilities and costs reside between the Seller and the Buyer and to define the point at which risk of loss and damage passes from one party to the other.
Incoterms® can go relatively unnoticed as thankfully, the majority of shipments pass by without a hitch. However, it’s when issues arise, particularly relating to loss or damage, that they come to the fore. At this point, whatever Incoterm® has been included in the contract will dictate where risk has been passed from Seller to Buyer and who is responsible for, essentially, sorting it out.
Some Incoterms® can seem very similar to others on the surface but the subtle variances can make a big difference in where responsibility passes from the Seller to the Buyer. Hence, there are technicalities associated with each term but a brief Layman’s overview of the various Incoterms® is as follows;
EXW – Ex Works:
The seller is responsible for packing the goods suitably and making them available for collection at a named place, normally their premises. There is no further responsibilities and the loading of the goods is at the Buyer’s risk. However, please see further down the article for reasons why EXW should be avoided in export sales contracts.
FCA – Free Carrier:
The Seller arranges pre-carriage to a named place. This could still be the Seller’s warehouse, or say, a U.K Airport or anywhere in between. Risk then transfers to the Buyer at this named place. Fundamentally, the Seller is responsible for clearing the goods for export, thus importantly, entitling them to proof of export.
CPT – Carriage Paid To:
The Seller arranges carriage to a named place but is not responsible for insuring the goods. Risk transfers to the Buyer at the point the goods are taken in charge by the first carrier. In the case of air freight for example, this named place would normally be an airport in the destination country.
CIP – Carriage and Insurance Paid To:
Essentially, this is the same as CPT but the Seller is also responsible for insuring the goods up to the named place.
DAT – Delivered at Terminal:
The Seller is responsible for delivery to and unloading at the named terminal, be it a container yard, airport warehouse etc. Once unloaded, risk transfers to the Buyer. The important point to highlight with this and the other ‘D’ terms is that the Seller is responsible for the risk during the main carriage. Customs clearance and payment of local duties and taxes is the responsibility of the Buyer.
DAP – Delivered at Place:
Similar to DAT where the Seller is responsible for the main carriage and delivery to the named place however unloading is the responsibility of the Buyer in this situation.
DDP – Delivered Duty Paid:
As the name suggests, the Seller is responsible for the main carriage and delivery to a named place as with DAP but in this case, the Seller is also responsible for the import clearance and payment of local duties and taxes. This can cause issues as these processes can prove to be complicated and bureaucratic in some countries, so use of this term should be avoided where possible. Unloading at the named place is the responsibility of the Buyer.
The final 4 terms on the list are sea freight only terms, specifically for non-containerised freight. Goods shipped by sea in containers can use (and it is advantageous to use) the first 7 terms.
FAS – Free Alongside Ship:
Similar to the FCA term but as the name suggests, the Seller is responsible for transporting the goods and delivering them alongside the vessel at the named port including clearing them ready for export. Risk then transfers to the Buyer who is responsible for the loading of the goods on to the vessel and any costs from there on.
FOB – Free On Board:
Essentially the same as the FAS term but the Seller has the added responsibility of loading the goods onboard the vessel. Once loaded, costs and risk from this point become the responsibility of the Buyer.
CFR – Cost and Freight:
The (non-containerised) sea freight equivalent of CPT, the Seller is responsible for delivering the goods to the vessel, loading them onboard, including clearing the goods for export and also bearing the cost of transportation to a named port. Risk transfers from Seller to Buyer once the goods are loaded on to the vessel.
CIF – Cost Insurance and Freight:
As CFR but the Seller is also required to insure the goods up to the named port in addition to the other responsibilities outlined under the CFR term.
For the first seven terms above, each one should include either a named place of delivery or destination. The final four terms should include either a named port of shipment or port of destination. Without the inclusion of the named place the Incoterm is incomplete making it ineffective.
As mentioned above, although it appears to be an attractive option for the Seller with minimal responsibility and cost, EXW should not be used for export sales. Under the EXW term the Buyer would be responsible for the export of the goods which in reality, they would not be able to carry out and therefore by default the Seller would become the exporter without entitlement to proof of export which could lead to problems with HMRC with respect to VAT. The recommendation is always to use FCA (+ named place of delivery) as an absolute minimum for all export sales.
Incoterms® are very important in international trade. At Access to Export, we strive to ensure the correct Incoterm® is contained in your export sales contracts and documentation to make sure that costs, responsibilities and transfer of risks are clearly defined and understood by all parties.
Get in touch with us either by phone or using the contact form and we will be happy to advise on how they should be used and incorporated correctly.