Incoterms (from the English International Commercial Terms) is a set of international rules for the interpretation of the most commonly used commercial clauses in foreign trade.
Incoterms were established in Paris in 1936. The International Chamber of Commerce issued them in order to eliminate the problems associated with the diversity of trade codes of different countries. As international trade underwent major changes, in 1953, 1967, 1976, 1980, 1990, 2000 and in 2010 the Incoterms were gradually modified to their current form.
The eighth edition, Incoterms 2010, entered into force on 1 January 2011. The changes concern all five conditions so far listed in Section D, which are obsolete and replaced by the following three conditions: DAT (Delivered at Terminal), DAP (Delivered at Place) and DDP (Delivered Duty Paid). The new conditions apply to all modes of transport.
They deal with the relations arising from the purchase contract, obligations during customs clearance, packaging of goods, or taking over the delivery. Although Incoterms have always been intended for international trade, they are sometimes used in national trade agreements.
Incoterms are not in the nature of a legal norm, they become binding only if the parties expressly refer to them in the purchase contract. They are based on the principle of determining the minimum obligations of the parties. The business parties may agree on a wider range of obligations in the purchase contract, or stipulate changes or amendments to the interpretation of Incoterms. In this case, care must be taken not to change the nature of the clause to such an extent that the court refuses to recognize the interpretation of the clause in relation to Incoterms in a possible dispute.
Since 2000, Incoterms have had 13 classes, divided into four categories. From 1.1.2011, the new version of Incoterms contains only 11 clauses and 2 categories for conditions applicable to all modes of transport and conditions apply only to maritime transport.
The basis for a correct understanding of Incoterms is to distinguish the moment of the transfer of expenses and risks from the seller to the buyer:
transfer of expenses and risks when sending goods – expenses and risks associated with transport are borne mainly by the buyer,
transfer of expenses and risks in the delivery of goods – expenses and risks associated with transport are borne mainly by the seller.
The goods are taken away by the buyer directly from the seller’s plant, the buyer is responsible for the goods from the moment of receipt.
EXW (Ex Works) – ex-works (arranged place)
The sole responsibility of the seller is to make the goods available to the buyer in his plant. The seller is not responsible for loading the goods on the means of transport provided by the buyer unless otherwise agreed. The buyer bears all expenses and risks associated with the transport of goods from this place to the destination. This clause represents the minimum commitment of the seller. This clause should not apply if the buyer is unable to complete the export formalities directly or indirectly. In these cases, the FCA clause should be used.
The seller is invited to deliver the goods to the carrier designated by the buyer.
FCA (Free Carrier) – paid to the carrier (agreed place)
The buyer chooses the place of delivery to the carrier. The seller will fulfil his obligations by delivering the goods available for transport at the agreed place. Costs and risks are passed on to the buyer at the time the goods are taken over by the carrier.
FAS (Free Alongside Ship) – paid to the side of the ship (arranged port of embarkation)
The seller will fulfil his obligations as soon as the goods have been delivered to the side of the ship or in a boat to the side of the ship. The buyer determines the ship and bears all risks and expenses from this moment. The buyer is also obliged to clear the goods for export.
FOB (Free On Board) – paid on board (arranged port of embarkation)
The seller is obliged to deliver the goods to the ship at the port of embarkation, which was agreed in the purchase contract. The buyer chooses the ship and pays additional shipping. Expenses and risks are transferred from the seller to the buyer by crossing the railing of the ship. Export formalities are provided by the seller.
The seller must secure the contract of carriage without assuming the risk of loss or damage to the goods.
CFR (Cost and Freight) – expenses and freight paid (agreed port of destination)
The seller selects the ship and pays the sea freight up to the agreed port. The seller provides export formalities and bears the costs associated with loading the goods. The risk of loss of or damage to the goods, as well as any increase in expenses, passes from the seller to the buyer by running the ship’s rail at the port of embarkation (as for FOB).
CIF (Cost, Insurance and Freight) – expenses, insurance and freight paid (agreed port of destination)
It is the same clause as the CFR, but in addition, the seller is obliged to provide marine insurance against the risk of loss or damage to the goods during transport. This is insurance under FPA conditions for 110% of the value of the goods. The seller pays insurance premiums.
CPT (Carriage Paid To) – carriage paid by … (agreed destination)
The seller selects the carrier and pays the costs associated with the goods and transport to the agreed destination. The risks associated with the loss or damage to the goods, as well as the risk of increased expenses during the transport of the goods, pass from the seller to the buyer by handing over the goods to the first carrier.
CIP (Carriage and Insurance Paid to) – transport and insurance paid to (agreed destination)
It is the same clause as the CPT, but in addition, the seller is obliged to take out transport insurance against damage to or loss of the goods during transport. The seller concludes a contract of carriage, pays the expenses associated with the carriage and insurance premiums.
The seller must bear all costs and risks associated with the entire route of transport of goods.
DAP (Delivered At Place) – with delivery to the place … This condition was introduced from 1.1.2011
The seller will fulfil his obligation by delivering the goods available to the buyer at the agreed destination in the country of importation without unloading, on a means of transport. However, the buyer bears the costs and risks associated with customs import formalities, pays customs duties and other costs associated with the import of goods (Replaces the older clause used for combined transport beyond Incoterms FOR – Free on Rail – released on the wagon).
DAT (Delivered At Terminal) – with delivery to the terminal … This condition was introduced from 1.1.2011
The seller will fulfil his obligation by delivering the goods available to the buyer at the agreed destination in the country of import with unloading at the transhipment point. However, the buyer bears the costs and risks associated with the customs import formalities, pays the customs duties and other costs associated with the import of the goods (Replaces the older clause used for combined transport beyond the Incoterms FOP – Free on Place) released at the transhipment point).
DDP (Delivered Duty Paid) – with delivery, duty paid (agreed destination)
The maximum obligation on the part of the seller. The seller bears the costs and risks associated with the goods, up to the buyer’s plant. Unless otherwise specified, the seller also pays for the unloading of goods.