What are incoterms?

Put simply, 'incoterms' are international commercial sales terms. These were published by the International Chamber of Commerce (ICC) and are now regularly used in international commercial transactions. 

They are most often used to separate transaction costs and responsibilities between buyers and sellers, reflecting modern transportation practices. 

Closely corresponding to the U.N. Convention on Contracts for the International Sale of Goods, the first version of Incoterms was introduced in 1936, but the most recent version dates from 2000 to the present.

Here we have listed each of the International Commercial Terms from 2000 onwards (Incoterms 2000), explaining what they mean. 

Liquidation 

Essentially, this is used to describe the process of a company, or part of a company, being brought to an end.

In which case, if a company was to fall into liquidation, the assets and property of that company would be redistributed elsewhere. 

CFR (Cost and Freight)

Cost and Freight (CFR) is a term often used in international commercial sales. The seller is responsible for paying the costs and freight to bring their goods to the right port of destination.

However, the risk is then transferred to the buyer as soon as the goods have crossed the ship's rail (maritime transport). 

CIF (Cost, Insurance and Freight) 

While very similar to Cost and Freight (CFR), CIF stands for: Cost, Insurance and Freight. The difference is that the seller must also procure and cover the cost of insurance for the buyer (maritime transport). 

CPT (Carriage Paid To) 

The term 'Carriage Paid To' describes the general or the multimodal equivalent of Cost and Freight. In this case, the seller would cover the cost of transport to the named destination location.

However, the risk passes when the goods are eventually handed to the first carrier. 

CIP (Carriage and Insurance Paid To)

This is essentially the same as CPT: the multimodal equivalent of CIF. However, the seller would cover the cost of transport and insurance to the named destination location. Again, the risk is passed when the goods are handed to the first carrier.

DAF (Delivered At Frontier)

Normally, this term is used when goods are shipped by rail or road. In which case, the seller pays for delivery to the named delivery location at the frontier. 

From there, the buyer would have to arrange for customs clearance and pay for delivery from the frontier to their business or premises. Another main difference is that the passing of risk happens at the frontier. 

DAP (Delivered At Place)

Delivered At Place is a term that can be used for any mode of transport, or where there are several transport modes. With DAP, the seller takes on the responsibility for arranging transport and delivering the goods, too.

From there, the goods are ready for unloading from the delivery vehicle, at the named delivery location - this is different to Delivered At Place Unloaded (DPU).

In this case, unloading is at the buyer’s risk as this is passed from the seller when the goods are ready to be unloaded. The buyer is also responsible for any import clearance, local taxes and import duties (if applicable).

DES (Delivered Ex Ship) 

DES is where goods are shipped Ex Ship. In which case, the passing of risk does not take place until the ship arrives at the named port of destination and of course, when the goods become available for unloading by the buyer. 

With DES, the seller would cover the same freight and insurance costs as they would under a CIF agreement.

However, unlike CFR and CIF terms, the seller will agree to bear both the cost and the risk and title up to the arrival of the ship at the allocated port. 

The buyer, on the other hand, would need to pay off the costs for unloading the goods along with any duties and taxes.

More to the point, DES is commonly used when shipping bulk commodities, like coal, grain and dry chemicals. 

DEQ (Delivered Ex Quay)

Though very similar to DES, the term DEQ means the passing of risk does not happen until the goods have been unloaded at the port of destination.  

DDU (Delivered Duty Unpaid) 

With DDU, the seller will deliver the goods to the buyer (to the named delivery location) in the contract of sale.

In this case, the goods are not cleared for import or even unloaded from any means of transport at the delivery location. 

The buyer is also responsible for any costs and risks for the unloading, duty and subsequent delivery past the delivery destination. 

However, should the buyer request the seller to bear the cost and risks associated with the import clearance, duty, unloading and delivery beyond the delivery location, this must be agreed upon in the contract of sale. 

DDP (Delivered Duty Paid)

With DDP, the seller will pay for all transportation costs and will bear all risk until the goods have reached the delivery location - they will also pay the duty. Another term used for this is 'Free Domicile'. 

In most cases, taxes such as VAT and excises must not be considered prepaid and therefore, do not normally represent a direct cost for the importer. Such costs will be recovered against the sales in the local market. 

EXW (Ex Works) 

Ex Works (EXW) is where the seller makes goods available at their premises. The buyer is then responsible for all charges. 

This term, while easy to administer, may not be in the sellers' best interests as there is no real control over the final delivery location of the goods.

However, it may be possible for the seller to negotiate better freight rates. 

FCA (Free Carrier) 

With Free Carrier, the seller hands over the goods, cleared for export and into the custody of the first carrier at the named location. This term is applicable for all means of transport, including by air, rail, road and multimodal transport too. 

FAS (Free Alongside Ship) 

With FAS, the seller must place the goods next to the ship at the designated port. Following the changes to the 2000 version of the Incoterms, they must then clear the goods for export (maritime transport).

FOB (Free on Board)

Free on Board means the seller must load the goods on board the nominated ship (nominated by the buyer) with the cost and risk being separated at ship's rail. The seller must then clear the goods for export (maritime transport). 

This also includes transport by air when the seller cannot export the goods at the scheduled time mentioned in the letter of credit.

In which case, the seller would allow a deduction of the sum equivalent to the carriage by ship from the air carriage FOB Freight 

On Board 

This is commonly used when shipping goods within the USA and indicates who will pay the loading and transportation costs, and the point at which the responsibility of the goods is handed from shipper to buyer. 

FOB Destination

This term designates the seller will cover shipping costs while remaining responsible for the goods until the buyer takes full possession. 

A similar but separate term, CAP, is used to express that the buyer will arrange a carrier of their choice to collect the goods from the sellers' premises.

In which case, the liability for any damage or loss belongs to the buyer. 

PO (Purchase Order)

A purchase Order is a commercial document issued by the buyer to the seller. It indicates types, quantities, and agreed costs for products or services the seller will provide to the buyer. 

Sending a PO to a supplier establishes a legal offer to purchase products or services.

Accepting a PO from a seller usually creates a one-time contract between the buyer and seller. However, no contract exists until the PO is officially accepted. 

Surplus

Surplus refers to any inventory, merchandise, or equipment that can no longer be sold at the Recommended Retail Price, but still possesses its value. 

This is generally the result of discontinuations, overruns, closeouts or overstock. Most businesses need to liquidate between 2 and 5 per cent of their products as surplus. 

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