A pre-determined set of rules defined by the International Chamber of Commerce (ICC); incoterms are an integral part of global business transactions and procurement processes. Initially published in 1936, these set of rules have last undergone revision in 2010. Recognized by governments, legal bodies around the globe, Incoterms are intended to reduce the complexities associated with trade.
What are Incoterms?
A set of rules that explains the delivery terms that are agreed between partners in trade is collectively called as incoterms. Incoterms are primarily classified into two on the basis of mode of transport. Utilized in both International and domestic contracts, the groupings aid in simplifying the drafting of trade contracts. The latest version of Incoterms-2010 includes eleven new rules which have been grouped under two categories on the basis of mode of transport. The main aim of these new rules is to simplify the construction of international & domestic sales contract and thereby help traders to avoid misunderstandings / disputes by stipulating the obligations of buyers and sellers in explicit terms.
Incoterms rules that apply to any mode of transport – Group 1
- EX W Ex Works
- F CA Free Carrier
- C PT Carriage Paid To
- C IP Carriage and Insurance Paid To
- D AT Delivered at Terminal
- D AP Delivered at Place
- D DP Delivered Duty Paid
Incoterms rules that apply to sea (Maritime Transport) and inland waterway transport – Group 2
- F AS Free Alongside Ship
- F OB Free on Board
- C FR Cost and Freight
- C IF Cost, Insurance, and Freight
Group I: Incoterms that are applicable to inland and waterways only
- FAS (Free Alongside Ship): A reversal from usual practices, this mode calls for the shipper to clear goods for export and the buyer takes responsibility of consignment.
- FOB (Free On Board): FOB specifies the transfer of merchandise between ports through ocean or inland waterways. Delivery is completed when the shipper releases the consignment to the buyer’s freight forwarder and simultaneously the ownership of insurance and transportation of the consignment gets transferred to the buyer.
- CFR (Cost and Freight): In this arrangement, the shipper takes responsibility of transferring the goods from the warehouse to the destination port whereas the buyer has the responsibility of covering insurance during this transit phase.
- CIF (Cost, Insurance and Freight): While this is similar to CFR, in this arrangement the shipper takes the ownership of insurance of the consignment throughout transit and also has the authority of choosing the freight forwarder.
Group II: Incoterms that are applicable to any mode of transportation
- Free Carrier (FCA): The seller is responsible for the arranging transport of goods, but acts at the expense and the risk of the buying party. While buyer is responsible for the insurance of the consignment, goods delivery is completed at a pre-determined destination.
- EXW (Ex –Works): One among the simplest arrangements, this places minimal ownership of consignment on the seller and more responsibilities are shared with the buying party. In this arrangement, the buyer party is responsible for making the necessary arrangements for insurance, clearance and other documentation.
- CPT (Carriage Paid To): The shipper has similar responsibilities as in CIF, only that the seller also has to buy cargo insurance in the name of the buyer during transit.
- CIP (Carriage and Insurance Paid To): Generally used during multiple modes of transportation for transit, during this arrangement freight forwarders are used as carriers. The buyers insurance is active once the goods are handed over to the freight forwarder.
- DAT (Delivered At Terminal): Utilized for any kind of shipment, the shipper pays for transit to the terminal except any charges related to import clearance and takes upon all risks to the point where consignments are unloaded at the destination terminal.
- DAP (Delivered At Place): Applicable for any type of shipment, the shipper pays for carriage of consignment until a specified place except costs towards import clearance and takes ownership of all risks prior to unloading by the buyer.
- DDP (Delivered Duty Paid): Used in courier type or intermodal shipments, the shipper takes upon the responsibility of all the functions associated with transit of goods between the seller and the buyer.
Incoterms-2010 vs Older version of Incoterms
The Incoterms, an abbreviation of International Commercial Terms refers to a set of internationally recognized rules which define the responsibilities of sellers (exporter) and buyers (importer) associated with the transportation & the delivery of goods under sales contracts, to be executed in the field of domestic and international trade. Incoterms basically aims at reducing the misunderstanding among the traders by clarifying the tasks, costs and risks involved in the delivery of goods from sellers to buyers under different conditions of sale and thereby minimizing trade disputes & costly litigation. These terms are published by the International Chamber of Commerce (ICC) and are widely used in international commercial transactions. The first version of Incoterms was published by ICC in the year 1936. The Incoterms had been continuously reviewed and evaluated periodically by the international trade experts of ICC to accommodate changes in the mode of transport & trade practices that took place in the overall global business environment during the past decades. Accordingly the revised edition of Incoterms-2000 was published by ICC which served the international trade for many years. ICC again felt the necessity to revise and update the version of Incoterms-2000 with a view to meet the challenge of new trends & practices in global transportation, need for improved cargo security and changing shipment & delivery terms due to rapid expansion of world trade. Thus the latest version Incoterms-2010 came into practice to meet the changed environment of international and domestic trade effectively. Incoterms-2010 was launched in September 2010 and became effective in 2011.