Incoterms Rules – International Sales Terms

Incoterms Rules – International Sales Terms

Incoterms is short for International Commercial Terms, i.e. international sales terms. They are designed to make trade easier between counterparties who often come from different countries and are therefore subject to different legal systems.

Incoterms 2020 sets out 11 basic trade rules that define the obligations and responsibilities of the buyer and seller. They cover things like the transport of goods, their insurance, and unloading. This means businesses from different countries don't need to settle every circumstance of a transaction between themselves — it's enough for them to agree on a specific rule.

Incoterms 2020 rules for land transport

The Incoterms 2020 rules are:

1. EXW Ex Works – means the seller delivers the goods at the disposal of the buyer (e.g. at a factory or warehouse), and the place of delivery does not have to be the seller's own premises. It's recommended, however, that the parties specify as precisely as possible the exact point within the named place of delivery. For delivery to take place under this rule, the seller does not need to load the goods onto any collecting vehicle, nor does it need to clear the goods for export, where such clearance applies.

2. FCA Free Carrier – means the seller delivers the goods to the buyer in one of two ways: first, when the named place is the seller's own premises, the goods are delivered once they are loaded onto the means of transport arranged by the buyer. Second, when the named place is somewhere else, the goods are considered delivered once loaded onto the seller's means of transport, when they have reached that other named place and are ready for unloading from the seller's means of transport, and are at the disposal of the carrier or another person nominated by the buyer.

3. CPT Carriage Paid To – means the seller delivers the goods — and transfers the risk — to the buyer by handing them over to a carrier engaged by the seller, or by procuring the goods so delivered. The seller can do this by handing over physical possession of the goods to the carrier, in a manner and at a place appropriate to the means of transport used. Once the goods have been delivered to the buyer in this way, the seller does not guarantee that the goods will arrive at their destination in good condition, in the stated quantity, or at all. This is because risk transfers from the seller to the buyer once the goods are delivered to the buyer by being handed over to the carrier. However, the seller must always contract for the carriage of the goods from delivery to the agreed place of destination.

4. CIP Carriage and Insurance Paid To – means the seller delivers the goods — and transfers the risk — to the buyer by handing them over to a carrier engaged by the seller, or by procuring the goods so delivered. The seller can do this by handing over physical possession of the goods to the carrier, in a manner and at a place appropriate to the means of transport used. Unlike under CPT, the seller must also contract for insurance cover against the buyer's risk of loss of or damage to the goods, from the point of delivery to at least the point of destination.

5. DAP Delivered at Place – means the seller delivers the goods — and transfers the risk — to the buyer when the goods are placed at the disposal of the buyer on the arriving means of transport, ready for unloading at the named place of destination or at the agreed point within that place, if such a point is agreed. The seller bears all risk involved in delivering the goods to the named place of destination or the agreed point within that place. Under DAP, delivery and arrival at the place of destination are therefore the same thing.

6. DPU Delivered at Place Unloaded – means the seller delivers the goods — and transfers the risk — to the buyer when the goods, once unloaded from the arriving means of transport, are placed at the disposal of the buyer at the named place

of destination or at the agreed point within that place, if such a point is agreed. The seller bears all risk involved in delivering and unloading the goods at the named place of destination. Under DPU, delivery and arrival at the place of destination are therefore the same thing. DPU is the only rule that requires the seller to unload the goods at the place of destination. The seller should therefore make sure they are able to arrange unloading at the named place. If the parties intend for the seller not to bear the risk and cost of unloading, this rule should be avoided in favour of DAP.

7. DDP Delivered Duty Paid – means the seller delivers the goods to the buyer when the goods are placed at the disposal of the buyer, cleared for import, on the arriving means of transport, ready for unloading at the named place of destination or at the agreed point within that place, if such a point is agreed. The seller bears all risk involved in delivering the goods to the named place of destination or the agreed point within that place. Under DDP, delivery and arrival at the place of destination are therefore the same thing.

Incoterms rules for sea transport

1. FAS Free Alongside Ship – means the seller delivers the goods to the buyer when the goods are placed alongside the ship (for example on a quay or a barge) nominated by the buyer at the named port of shipment, or when the seller procures the goods so delivered. The risk of loss of or damage to the goods transfers to the buyer once the goods are alongside the ship, and the buyer bears all costs from that point onward.

2. FOB Free On Board – means the seller delivers the goods to the buyer on board the vessel nominated by the buyer at the named port of shipment, or procures the goods so delivered. The risk of loss of or damage to the goods transfers once the goods are on board the vessel, and the buyer bears all costs from that point onward.

3. CFR Cost and Freight – means the seller delivers the goods to the buyer on board the vessel, or procures the goods so delivered. The risk of loss of or damage to the goods transfers once the goods are on board the vessel, such that the seller is deemed to have fulfilled its obligation to deliver the goods, regardless of whether the goods actually arrive at the destination in good condition, in the stated quantity, or at all. Under this rule, the seller has no obligation to the buyer to insure the goods: it's therefore recommended that the buyer arranges insurance for themselves.

4. CIF Cost, Insurance and Freight – means the seller delivers the goods to the buyer on board the vessel, or procures the goods so delivered. The risk of loss of or damage to the goods transfers once the goods are on board the vessel, such that the seller is deemed to have fulfilled its obligation to deliver the goods, regardless of whether the goods actually arrive at the destination in good condition, in the stated quantity, or at all. The seller must also contract for insurance cover against the buyer's risk of loss of or damage to the goods, from the port of shipment to at least the port of destination.

The Incoterms rules are divided into rules for any mode of transport and rules that apply only to sea and inland waterway transport.

The rules for any mode of transport are EXW, FCA, CPT, CIP, DAP, DPU and DDP.

The rules for sea and inland waterway transport are FAS, FOB, CFR and CIF.

*the description of the rules is based on the official handbook of the International Chamber of Commerce, Incoterms® 2020, Polish-English edition (ICC No. 723 PL/EN).

Watch the video: How to Understand International Trade Terms - Complete Guide