Definition and Responsibilities of Incoterms

Definition Of Incoterms

• Incoterms (International Commercial Terms) are standardized trade terms published by the International Chamber of Commerce (ICC).
• They define the responsibilities of buyers and sellers in international shipments, specifying who is responsible for shipping, insurance, duties, and risks.
• The latest version, Incoterms 2020, came into effect on January 1, 2020.

Responsibilities Of Buyers And Sellers

• Sellers' Responsibilities:

  • Deliver goods as per the agreed Incoterm.
  • Obtain and pay for export licenses and clearance.
  • Arrange for transportation to the agreed location.
  • Provide necessary documentation (e.g., invoices, shipping documents).

• Buyers' Responsibilities:

  • Pay for goods and transportation as per the contract.
  • Obtain and pay for import licenses and clearance.
  • Handle insurance and risk once the goods are delivered as per the Incoterm.

Categories Of Incoterms

• Group 1: Rules for Any Mode of Transport

  1. EXW (Ex Works) - Seller makes goods available at their premises; buyer takes all responsibility.
  2. FCA (Free Carrier) - Seller delivers to a named place; risks transfer to buyer upon delivery.
  3. CPT (Carriage Paid To) - Seller pays for transport to destination; risk transfers upon delivery to carrier.
  4. CIP (Carriage and Insurance Paid To) - Similar to CPT but includes insurance paid by the seller.
  5. DAP (Delivered at Place) - Seller delivers to a specified destination; risk transfers upon delivery.
  6. DPU (Delivered at Place Unloaded) - Seller delivers and unloads at destination; risk transfers after unloading.
  7. DDP (Delivered Duty Paid) - Seller is responsible for all costs, including duties, until goods are delivered.

• Group 2: Rules for Sea and Inland Waterway Transport

  1. FAS (Free Alongside Ship) - Seller delivers goods alongside the ship; risk transfers at that point.
  2. FOB (Free On Board) - Seller delivers goods on board the vessel; risk transfers once on board.
  3. CFR (Cost and Freight) - Seller pays for transport to the port; risk transfers on board the vessel.
  4. CIF (Cost, Insurance and Freight) - Similar to CFR but includes insurance paid by the seller.

Impact On International Trade

• Provides clarity and reduces disputes between trading partners by clearly defining roles and responsibilities.
• Essential for compliance and risk management in global trade, enhancing transparency.
• Helps streamline logistics and shipping processes, leading to improved efficiency in international transactions.
• Facilitates smoother cross-border trade by aligning practices and expectations across different countries.

Definition Of Incoterms

• Incoterms stand for International Commercial Terms and are published by the International Chamber of Commerce (ICC).
• These terms clarify the obligations of buyers and sellers in international trade, detailing responsibilities for shipping, insurance, duties, and risks.
• The current version, Incoterms 2020, was implemented on January 1, 2020.

Responsibilities Of Buyers And Sellers

• Sellers' Responsibilities:
  • Must deliver goods in accordance with the chosen Incoterm.
  • Responsible for obtaining and covering costs for export licenses and clearances.
  • Required to arrange transportation to the agreed-upon location.
  • Needed to provide essential documentation, including invoices and shipping papers.
• Buyers' Responsibilities:
  • Obligated to pay for the goods and transportation as per the contractual agreement.
  • Must obtain and finance import licenses and clearances.
  • Assume responsibility for insurance and risk once goods are delivered as per the selected Incoterm.

Categories Of Incoterms

• Group 1: Rules for Any Mode of Transport

  • EXW (Ex Works): Seller makes goods available at their premises; buyer bears all subsequent responsibility.
  • FCA (Free Carrier): Seller delivers goods to a specified location; risk transfers to the buyer upon delivery.
  • CPT (Carriage Paid To): Seller covers transport costs to the destination; risk shifts to the buyer when delivered to the carrier.
  • CIP (Carriage and Insurance Paid To): Similar to CPT, but the seller also pays for insurance.
  • DAP (Delivered at Place): Seller delivers to a designated location; risk transfers at this point.
  • DPU (Delivered at Place Unloaded): Seller delivers and unloads at the destination; buyer assumes risk after unloading.
  • DDP (Delivered Duty Paid): Seller assumes all responsibilities and costs, including duties, until delivery.

• Group 2: Rules for Sea and Inland Waterway Transport

  • FAS (Free Alongside Ship): Seller delivers goods next to the ship; risk transfers to the buyer at this stage.
  • FOB (Free On Board): Seller delivers goods onto the vessel; risk transfers once placed on board.
  • CFR (Cost and Freight): Seller pays transport to the port; risk passes when goods are on the vessel.
  • CIF (Cost, Insurance and Freight): Similar to CFR, but includes insurance provided by the seller.

Impact On International Trade

• Enhances clarity and reduces disputes by explicitly defining buyer and seller roles.
• Crucial for compliance and risk management in global trade, improving overall transparency.
• Streamlines logistics and shipping operations, resulting in greater efficiency in international transactions.
• Facilitates smoother cross-border trading by standardizing practices and expectations among countries.