What are Incoterms and how do they work?

If you work in freight or have ever had to ship products B2B, you may have heard of Incoterms – International Commercial Terms.

They can seem like a secret language but they don’t have to be a mystery. Pinnacle Freight explains.

Incoterms® are commercial terms from the International Chamber of Commerce which aim to aid communication between manufacturers, shipping companies, and the eventual consumers or distributors. These terms help to reduce confusion when discussing the terms of transactions.

Incoterms® are a series of 3 letter terms that relate to all common contractual sales practices, including where the deliveries will be picked up and dropped off, where they will change hands, who is liable for damage, and payment terms.

Take the term ‘DAP’, for example, which stands for ‘Delivered at Place’, and signals that the seller is now obligated to pay for loading, export customs clearance, freight and destination delivery, but not final destination import customs or unloading.

These terms were first written way back in 1936 and have since been amended nine times. The most recent amendment resulted in the newest version, ‘Incoterms® 2020’, which was published on September 10 2019.

Full list of Incoterms® and their meanings

EXW – Ex Works (insert named place of delivery)

FCA – Free Carrier (insert named place of delivery)

CPT – Carriage Paid To (insert named place of delivery)

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

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

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

DDP – Delivered Duty Paid (insert named place of destination)

For sea and inland waterway transport:

FAS – Free Alongside Ship (insert named port of shipment)

FOB – Free on Board (insert named port of shipment)

CFR – Cost and Freight (insert named port of destination)

CIF – Cost Insurance and Freight (insert named port of destination)

Key terms used in Incoterms® 2020:

Carrier – the party to whom carriage is contracted

Customs formalities – compliance with customs regulations

Delivery – where the risk of loss or damage to goods passes from seller to buyer

Delivery document – document used to prove that delivery has occurred

Electronic record or procedure – one or more electronic messages equivalent to corresponding paper document

Packaging – in compliance with the contract or fit for transportation or stowage within a container or other means 

How are Incoterms® used?

Incoterms® are used by trade councils, courts and international lawyers to define any transactions, logistics, transportation and all possible risks, costs and responsibilities in easy to understand terms.

The freight industry is complex and has a lot of moving parts. Shipping isn’t always as simple as a product being placed in a van and being driven right to the distributor; it’s likely to change hands along the way.

It’s so important that all parties understand all the terms of any transaction to avoid mistakes and hold-ups. Incoterms® aren’t compulsory though, and any contracts should contain more details than just the Incoterms®. Whilst they’re not the only thing that should be presented in a contract, they are legally binding when used in the context of a sales contract signed by the buying and selling parties. If you’re using Incoterms® within a sales contract, you need to make this clear when writing it and also make sure you’re choosing the right terms for the situation, including insurance restrictions, consideration of local laws and infrastructure, and your relationship with the customer.

Should you need any guidance and advice with regards to Incoterms® and your international shipments, contracts of sale, letters of credit and or any relevant documentation for import or export, please feel free to contact the team at Pinnacle today.

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