Incoterms or International Commercial Terms include a predefined set of business terms published by the International Chamber of Commerce in relation to international trade law. These terms are widely used in international trade transactions. They are encouraged by business representatives, courts, as well as international attorneys. .
The first published document of international trade terms was published in 1923, and the first document published as Incoterms was published in 1936.
Terms defined in Incoterms
Some terms in Incoterms have different meanings. Incoterms are divided into two main categories:
- Incoterms terms suitable for a variety of shipping methods
- Incoterms terms suitable for sea freight and shipping
In the following, before introducing the terms Incoterms suitable for various methods of transportation, especially maritime transportation, we will introduce very important general concepts in it. Some of the most important Incoterms terms include the following:
- Delivery: Delivery is the point in the transaction where the risk of loss or damage to the goods is transferred from the seller to the buyer.
- Arrival: or delivery, the point at which shipping costs are paid.
- Free: The seller undertakes to deliver the goods to the point from which they are to be transported.
- Carrier: Anyone who, under a contract of carriage, assumes the task of transporting by train, road, air, sea, river, or a combination of these methods.
- Freight Forwarder: The company in which the freight forwarder concludes or participates.
- Terminal: Any covered or uncovered location such as a warehouse, parking lot, container garage or road, rail, or air freight terminal.
- To clear for export: Receive export clearance certificate and get export license.
Incoterms terms suitable for a variety of shipping methods
Some Incoterms terms apply to all methods of transporting goods. These terms are used to specify the type of contract and describe the duties and obligations of the parties in the transaction process.
EXW – EX Works
In this method, after the expression EXW, the name of a destination is placed. The seller is obliged to deliver the cargo to this destination. This term creates a maximum commitment on the buyer and a minimum commitment on the seller. This term is often used to quote initial pricing without calculating any additional costs.
The term EXW means that a buyer takes the risks of delivering the goods to the final destination. If the seller does not load the goods or does not take their clearance for export, or loads the goods, in any case the risk and cost is with the buyer.
If the parties agree that the seller must load the goods and send them to a specific point to participate in the risk, the agreement must be clearly recorded in precise terms to affect this type of contract.
FCA – Free Carrier
In this method, the seller delivers the goods to the buyer in a specific place along with the export clearance. The goods may be delivered to a carrier designated by the buyer, or to another party designated by the buyer. The term international trade has in many ways replaced the term FOB in new uses. The term used to mean the delivery of goods at a port or place of delivery, which in the FCA term has become a geographical destination. Only the risk transfer point in this term has changed from the port to the point or place of delivery of the goods.
The location chosen in this type of contract has a significant impact on the obligations of loading and unloading goods. If the delivery is part of the seller’s obligations, or takes place in any place under the seller’s supervision, he will be responsible for loading the goods on the buyer’s carrier. However, if the delivery takes place elsewhere, upon arrival at the destination, the duty of delivering the cargo is removed from the seller, thus the buyer is responsible for emptying the cargo and filling it in the buyer’s carrier.
CPT – Carriage Paid To
In this method, the seller bears the cost of transporting the goods to the named destination. In this method, when the goods are loaded on the first carrier, the risk of the goods is transferred from the seller to the buyer. In this method, the seller is responsible for the initial costs, including export clearance and shipping costs to the destination.
It does not matter if the destination is the destination or one of the ports of the country of sale, however, this location must be specified in the contract. If the buyer asks the seller to provide insurance for the load, then the term CIP Incoterms should be used in the contract instead.
CIP – Carriage and Insurance Paid To
The term is very similar to the CPT, except that the seller undertakes to insure the goods in transit. In this method, the seller must insure the cargo up to 110% of its declared value in accordance with the rules of international insurance. This must be done in the same currency used in the contract and must be agreed upon by the buyer, seller, and anyone else who benefits from the insurance. The CIP rule can be applied to a variety of shipping methods.
DPU – Delivered at Place unloaded
The term Incoterms indicates that the seller must unload and deliver the goods to the named destination. In this method, the seller pays all cargo costs (export rates, transportation, cargo unloading from the carrier to the destination or terminal and destination costs) and assumes all risks until the cargo reaches the specified point in the contract.
This terminal may be a port, airport, or an internal cargo exchange terminal, but it must be able to receive cargo. All costs after unloading the cargo (for example, import, tax, customs, and freight) are the responsibility of the buyer. It should be noted that any costs of delays and delays in the terminal are often the responsibility of the seller.
DAP – Delivered At Place
In Incoterms 2010, the term DAP for “on-site delivery” is defined as: The seller delivers the goods to the buyer at the destination mentioned. According to the DAP, the risk of freight is transferred from the seller to the buyer when the goods reach the place specified in the contract.
As soon as the goods are ready to be shipped, the necessary packaging is done by the seller at his own expense, and thus the goods reach their destination safely. All necessary legal formalities in the country to which the goods are exported are the responsibility of the seller and at his expense, and the risk of whether the goods are cleared or not is the responsibility of the seller.
Upon arrival of the goods to the destination country, customs clearance of the goods and all related documents must be done by the buyer. According to the terms of the DAP, all shipping and terminal costs will be paid by the seller until they reach the agreed destination. The cost of unloading the cargo at the final destination is the responsibility of the buyer.
DDP – Delivered Duty Paid
In this method, the seller is responsible for delivering the goods to the place mentioned in the country of the buyer, and pays all costs until the cargo reaches the destination, including customs and imports and related taxes. In this method, the seller is not responsible for unloading the cargo. In this method, the maximum duties are the responsibility of the seller and the minimum duties are the responsibility of the buyer. No risk or responsibility is borne by the buyer until the load reaches the specified point.
The most important thing about Incoterms DDP is that the seller is responsible for clearing the goods at the customs of the buyer’s country, and this includes paying the related fees as well as carrying out legal procedures and providing the necessary documents. For this reason, if the seller is not well acquainted with the import laws of the destination country, this method can be very risky for him and he will incur a lot of costs.
Concluding remarks
You have learned that International Trade Terms or Incoterms is a set of rules and procedures defined in the trade, import and export of goods that are developed and updated by the International Chamber of Commerce. These terms are predefined terms that minimize ambiguities in the duties of the parties to the business. Some of these terms can be applied to all modes of transportation. However, some of these terms are used in specialized fields of transportation. In this article, while introducing the main terms in Incoterms, we introduced the most important procedures and terms that are used in all transportation companies.