All about Incoterms

The Incoterms® (abbreviation of International commercial terms) rules were developed by the International Chamber of Commerce to facilitate international trade and for the interpretation of the trade terms that the parties to a contract of sale could agree to apply..

Incoterms® were first introduced in 1936 and were revised in 1957, 1967, 1976, 1980, 1990, 2000 and 2010 to accommodate changes as global trade developed and evolved..

Currently, in its 8th version, the Incoterms® rules have become an internationally recognized and accepted standard and are used worldwide in international and domestic contracts for the sale of goods and have become an essential part of the day-to-day international trade and domestic trade..

The rules have been developed and maintained by experts and practitioners brought together by the ICC.. Launched in mid-September 2010, Incoterms® 2010 came into effect on 1 January 2011 and is the latest version till it will be replaced by Incoterms 2020 on 25th September of 2019..

Incoterms help traders avoid costly misunderstandings by clarifying the tasks, costs and risks involved in the delivery of goods from sellers to buyers and has become the trademark used to designate the rules devised by the ICC..

Over the years, Incoterms® rules have provided guidance to importers, exporters, lawyers, transporters, insurers and others involved in international trade..

The different Incoterms Rules

As of Incoterms 2010, there are 11 Incoterm rules in use and they are classified as below :

Rules for any mode of transport – rail, road, sea, air, donkey cart……………

1. EXW – EX WORKS
2. FCA – FREE CARRIER
3. CPT – CARRIAGE PAID TO
4. CIP – CARRIAGE AND INSURANCE PAID TO
5. DAT – DELIVERED AT TERMINAL
6. DAP – DELIVERED AT PLACE
7. DDP – DELIVERED DUTY PAID

Rules for Sea and Inland waterway transport

1. FAS – FREE ALONGSIDE SHIP
2. FOB – FREE ON BOARD
3. CFR – COST AND FREIGHT
4. CIF – COST INSURANCE AND FREIGHT

Functions of Incoterms 

The core functions of Incoterms® is to

• Outline the obligations of the buyer and the seller in a trade transaction;
• Clarify when risk passes from the seller to the buyer under each of these rules;
• Outline how costs are allocated between the buyer and the seller;

It needs to be understood that Incoterms®:

• Is NOT the sales contract;
• Does not supersede the law governing the sales contract;
• Does not dictate where and to whom title to goods transfers;
• Does not address the price payable, the currency of transaction or credit terms

These items are defined by the express terms in the sales contract and by the governing law..

Explanation of the Incoterms 2010 Rules

Here is a bite-sized version of the 11 Incoterms currently in place (courtesy of David D Murray).. For a detailed and indepth version, please visit the ICC Store..

Incoterms 2010 Rules for any mode of transport

1) EXW – EX WORKS (… named place of delivery)

The Seller’s only responsibility is to make the goods available at the Seller’s premises.. The Buyer bears full costs and risks of moving the goods from there to destination..

2) FCA – FREE CARRIER (… named place of delivery)

The Seller delivers the goods, cleared for export, to the carrier selected by the Buyer. The Seller loads the goods if the carrier pickup is at the Seller’s premises.. From that point, the Buyer bears the costs and risks of moving the goods to destination..

3) CPT – CARRIAGE PAID TO (… named place of destination)

The Seller pays for moving the goods to destination.. From the time the goods are transferred to the first carrier, the Buyer bears the risks of loss or damage..

4) CIP – CARRIAGE AND INSURANCE PAID TO (… named place of destination)

The Seller pays for moving the goods to destination.. From the time the goods are transferred to the first carrier, the Buyer bears the risks of loss or damage.. The Seller, however, purchases the cargo insurance..

5) DAT – DELIVERED AT TERMINAL (… named terminal at port or place of destination)

The Seller delivers when the goods, once unloaded from the arriving means of transport, are placed at the Buyer’s disposal at a named terminal at the named port or place of destination..

“Terminal” includes any place, whether covered or not, such as a quay, warehouse, container yard or road, rail or air cargo terminal.. The Seller bears all risks involved in bringing the goods to and unloading them at the terminal at the named port or place of destination..

6) DAP – DELIVERED AT PLACE (… named place of destination)

The Seller delivers when the goods are placed at the Buyer’s disposal on the arriving means of transport ready for unloading at the named place of destination.. The Seller bears all risks involved in bringing the goods to the named place..

7) DDP – DELIVERED DUTY PAID (… named place)

The Seller delivers the goods cleared for import – to the Buyer at destination.. The Seller bears all costs and risks of moving the goods to destination, including the payment of Customs duties and taxes..

Incoterms 2010 Rules for Sea and Inland waterway transport

1) FAS – FREE ALONGSIDE SHIP (… named port of shipment)

The Seller delivers the goods to the origin port.. From that point, the Buyer bears all costs and risks of loss or damage..

2) FOB – FREE ON BOARD (… named port of shipment)

The Seller delivers the goods on board the ship and clears the goods for export.. From that point, the Buyer bears all costs and risks of loss or damage..

3) CFR – COST AND FREIGHT (… named port of destination)

The Seller clears the goods for export and pays the costs of moving the goods to destination.. The Buyer bears all risks of loss or damage..

4) CIF – COST INSURANCE AND FREIGHT (… named port of destination)

The Seller clears the goods for export and pays the costs of moving the goods to the port of destination.. The Buyer bears all risks of loss or damage.. The Seller, however, purchases the cargo insurance..

This article has been updated in 2019 with some changes..