INCOTERMS

 INCOTERMS is the abbreviated form of International Commercial Terms for Shipping and Transportation. It is a sales contract used worldwide. INCOTERMS was first introduced in 1936 by​  International Chamber of Commerce (ICC)  In our view at Badr International Company, these rules are a key entry point in the science of transport and logistics.

Why do we need Incoterms?

Shipments travel for several months before reaching their destination. Although shipping has become more secure in recent years, some shipments still fail to reach their destination or arrive damaged. When this happens, it's essential to determine who lost the goods.

For this reason, it is crucial for both the seller and the buyer to pre-defined the obligations and responsibilities that must be agreed upon. International trade terms encompass all possible ways of distributing obligations and responsibilities between two parties.

These obligations include:

1- Delivery Point: International trade defines the terms of the point of delivery of goods from the seller to the buyer. Incoterms defines the point of transfer of hands, meaning the transfer of risk and liability from the seller to the buyer.

2- Transportation costs: International trade determines which party pays for transportation costs. INCOTERMS specifies who pays for each part of the transportation. There are multiple shipping methods, particularly in the case of maritime transport.

3- Export and import procedures: International trade defines the terms (Incoterms) of the party that arranges the import and export procedures.

4- Insurance costs: International Trade Terms (Incoterms) determine who bears the insurance costs.

These are all important points that should be highlighted before proceeding with the purchase and shipping process.

Arranging for primary transport does not mean that the risk falls on the arranging party. The seller may arrange for primary transport even when the shipment has already been delivered (in which case the risk has been transferred to the buyer). In this case, the risk is transferred to the buyer, and the seller acts as the shipper without any risk to themselves.

Arranging insurance does not mean that the risk falls on the party arranging the insurance. In some Incoterms, the seller arranges insurance to cover the buyer's risks. In these cases, the seller is only required to cover the minimum risk as defined in the minimum risk clause of the relevant Incoterms. The buyer must obtain further insurance to cover any additional risks against which they wish to insure.

There are a total of 11 Incoterms established by the International Criminal Court. These are based on the principle of lesser liability for the seller and lesser liability for the buyer. For example,

INCOTERM EXW (Ex Works) is considered to have less liability for the seller.

INCOTERM DDP (Duties Paid in Full) is considered to be less liability for the buyer.

The goods are delivered to the buyer's location, with all customs, transportation, and clearance fees paid.

The remaining nine INCOTERMS conditions fall between the two parties.

One last thing before we delve into international trade terms head-on. Let's differentiate and group each Incoterm together. First, based on the method of transport used, and second, based on the point of delivery.

First group:

Seven trade terms can be used for any mode of transport, even if sea freight is not involved. Incoterms EXW, FCA, CPT, CIP, DAT, DAP, and DDP belong to this group.

second group:

Four trade terms are used only at sea or inland waterways. This is because, in these international trade terms, both the point of delivery and the destination are seaports. Incoterms FAS, FOB, CFR, and CIF belong to this second group.

Incoterms can also be grouped together into 4 categories based on the point of delivery.

• Group “E” (receipt from source factory), the delivery point is the seller’s headquarters.
• Then, Group “F” (FOB, FAS & FCA), the point of delivery is before or even the main carrier, with the main carrier transported without payment from the seller.
•  For Group “C” (CFR, CIF, CPT and CIP), the point of delivery is higher than the main carrier with the carrier paid by the seller.
•  Finally, for the “D” group (DAP, DAT and DDP), the delivery point is the final destination.

Now that we have clarified some important points, let's move on to each of the incterms.

1. EXW (Ex Works):

Means of transport: by sea, air, or land

Upon receipt of the goods from the source's factory premises, the seller or exporter bears minimal responsibility. The seller is responsible for delivering the goods to the buyer at the seller's premises, warehouse, or any other agreed-upon location. From this point forward, all responsibilities and risks fall upon the buyer. This means that the point of delivery is the seller's premises; therefore:

•   The buyer pays for export from the seller's headquarters and import to the destination.
•  Arranges for all means of transportation.
•  Pays for insurance
• EX WORK is often used when providing initial prices for sales contracts.

■ In practice, this Incoterms can face particular operational difficulties in cross-border transactions. These difficulties may include the buyer's inability to arrange export procedures.

2- Completed duties paid customs duty and cleared (DDP):

Means of transportation: multiple

• DDP (Delivery Paid)
• The fees paid are the opposite of EX WORK.
• The seller bears the greatest responsibility.
•  The seller is responsible for delivering the goods to the buyer's premises, warehouse, or any other location as agreed. This means that from the seller's premises to the buyer's premises or any other agreed location, the seller is responsible for delivery.

  The delivery point is the buyer's premises or another agreed location..

  ■The seller handles the goods and pays export and import duties, and arranges the transportation of the goods. This also means that in the case of sea freight, the seller is the shipper of the goods.
  ■ The seller pays for insurance. As with EX WORK, DDP can also face practical difficulties with cross-border tasks.

■ In DDP, the seller is responsible for clearing import procedures, but the seller may not have the local knowledge and experience to clarify the import procedures.

3. company Free Carrier (FCA):

Means of transportation: multiple

Free Carrier FCA

■ This means the seller or exporter sends the goods to the delivery point, which is the transport company or any other person designated by the buyer at the seller’s premises or any other agreed place.

■ If the agreed place is the seller's premises, delivery will be made when the goods are loaded onto the truck. If the agreed place is not the seller's premises, delivery will be made when the truck arrives at that location and is ready for unloading. (FCA)

■ The delivery point is the seller’s premises or any other agreed-upon location.

The buyer pays for exporting from the seller's headquarters and importing to the destination.

•  The buyer arranges for all transportation under FCA Incoterms.
•  The agreed location has implications for the carrier's loading.
•  If the agreed location is the seller's headquarters, the seller will handle the loading process.
• If the agreed place is other than the seller's place, the seller has delivered the goods as soon as the carrier arrives at the agreed place.
• FCA (Freight Commission for Sellers) may seem similar to EX WORK (Ex Works), but there is one key difference. In FCA, the seller is responsible for loading the goods onto the carrier.

4. Delivery of goods on board the ship (FOB):

Means of transportation: sea

FOB (Free On Board) delivery of goods​

The term "Free onboard" means the seller delivers the shipment to the carrier designated by the buyer. There is only one significant difference between FCA and FOB: the method of transport. While FCA applies to multimodal transport, FOB is used only for ocean freight. With FOB, the seller transfers the risk to the buyer once the shipment crosses the ship's rail. In FCA, the seller is obligated to load the shipment onto the carrier arranged by the buyer, which precedes the primary carrier.

5. Cost of goods and freight to port of arrival (CFR)

Means of transportation: sea

CFR stands for Cost and Freight, which is the cost of the goods plus shipping costs until they reach the buyer's or importer's port.

According to CFR, this means the seller bears the costs of shipping the goods to the destination, but the risk is shared with the buyer; it does not include insurance. This is also the main difference between Incoterms CFR and FOB.

In FOB, the seller delivers the shipment and passes the risk to the buyer once the shipment has passed the ship's rail. However, in CFR, the seller also pays the costs and freight until the shipment reaches the buyer's destination port.

This was precisely the point discussed earlier. Arranging for transport does not mean that the risk falls on the party arranging the transport. In this case, the seller arranges the primary transport (the seller is the shipper), but has already delivered the shipment or transferred the risk to the buyer when the shipment crosses the ship's barrier in an FOB (Free On Board) agreement.

6. Cost of goods including insurance and shipping (CIF)

Means of transportation: sea

Cost, Insurance, and Shipping (CIF)​

There is only one clear difference between CFR and CIF: the addition of insurance. The seller transfers the risk to the buyer when the shipment is loaded onto the carrier. However, the seller also arranges for the primary carrier (the seller being the shipper). In addition to this, the seller also pays for insurance to cover the buyer's risks during transit. Since the seller will be paying to cover the buyer's risks, they will want the minimum insurance coverage necessary to cover their obligations. The buyer should take this into account and purchase additional insurance if desired.

7. Free Side-by-Side (FAS)

Means of transportation: sea

Alongside the ship FAS

It's as simple as it sounds. The seller delivers the shipment to the buyer only when the goods are at the side of the ship, without loading them onto the ship as in FOB. The risk shifts from the seller to the buyer when the goods are brought at the side of the ship or on the dock.

8. Paid transfer to (CPT)

Means of transportation: multiple

Transportation is paid to CPT​

The seller pays for the primary carrier to bring the shipment to the agreed location. However, the seller transfers the risk to the buyer upon delivery to the primary carrier. This is the point we highlighted earlier: “Arranging for primary carrier transport does not mean that the risk lies with the arranging party.” Even when the seller arranges for the primary carrier, the risk has already been transferred to the buyer.

The buyer also arranges insurance from the point of delivery.

9. Transportation and Insurance Fees Paid (CIP)

Means of transportation: multiple

Transportation and insurance paid to CIP​

In CIP, the seller delivers the goods and transfers the risk to the buyer upon delivery to the primary carrier. The seller arranges and pays the primary carrier (the seller being the shipper) to bring the shipment to the agreed location. The seller also arranges insurance on behalf of the buyer to cover the buyer's risk. The key difference between CPT and CIP is that the seller also pays for the insurance. This point was highlighted earlier: "Arranging for insurance does not mean that the risk lies with the party arranging the insurance." Here, the seller pays for the insurance, but the risk is not with them. The seller arranges the insurance to cover the buyer's risk. CIP requires the seller to arrange insurance equal to 110% of the value of the goods under the minimum insurance claim. The buyer must insure themselves against any additional risks they believe they need to cover.

10. Delivery to Place (DAP)

Means of transportation: multiple

Delivered on site

DAP means seller delivery when the shipment arrives at the final destination and is ready for unloading from the incoming transport. The seller bears all costs and risks involved in bringing the goods to that location.

1) The seller shall bear the export, transportation, insurance and arrival port fees.

2) The buyer shall bear the import and unloading fees.

11. Delivered at the customer's or buyer's location (DAT)

Means of transportation: multiple

Delivered at DAT station

The seller delivers the shipment and transfers the risk to the buyer when the shipment is placed at the buyer's disposal at the final destination terminal. The seller is responsible for export, transportation, insurance, port charges, and unloading. The main difference between DAT and DAP is that in DAT, the seller handles the final unloading of the goods.

Common mistakes in using international trade terms:

1) The exact location is not included with the destination.

Using international trade terms requires precise location. For example, FCA Durban does not specify the exact location because Durban is a large area. Incoterms, however, must specify the exact location within Durban. For example, FCA Durban berth no. 42.

2) Using DDP incoterms without considering whether the seller has the knowledge and experience or whether local regulations allow him to clear import procedures in the buyer’s country.

3) Using Incoterms i.e. EXW without considering whether the buyer has the knowledge and experience or whether local regulations allow him to cancel export procedures in the seller’s country.​

4) Using international trade terms like “sea” or “inland waterways” for containerized goods. These four terms, used for inland and sea waterways, are not intended for containerized goods. They are actually meant for bulk and non-containerized goods. Using these international trade terms for containerized goods can expose exporters to unnecessary risks, as goods may have to wait several days before shipment.

This is a complete image of Incoterms 2020 as it is commonly known:

Finally, since these are terms that are understood and fixed in English letters, we will put their abbreviations here:

EXW – Ex Works (insert place of delivery)

FCA  – Free Carrier (Insert named place of delivery)

CPT  – Carriage Paid to (insert place of destination)

CIP –  Carriage and Insurance Paid To (insert place of destination)

DAP – Delivered at Place (insert named place of destination)

DPU – Delivered at Place Unloaded (insert of place of destination)

DDP – Delivered Duty Paid (Insert place of destination)

CIF  – (Cost, Insurance and Freight)

FOB  – (Free on Board)

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