What are INCOTERMS?

INCOTERMS (International Commercial Terms) are widely accepted

international rules applying to the tasks, costs, and risks involved in the delivery
of goods.

According to Emmanuel Jolivet, General Counsel of the International Court of

Arbitration:

"The INCOTERMS are a perfect example of an efficient standardization of

an international business tool. Their day-to-day use in international sales
contracts brings legal certainty to business transactions while simplifying
the drafting of international contracts.”

INCOTERMS were devised to facilitate global trade by providing clear

definitions of each party’s obligations, thus reducing the potential for legal
complications.

INCOTERMS cover the "who, what, and when" of international goods sales and
delivery, including:

• Who does what

• Who pays for what

• When does risk pass from seller to buyer

• When does delivery occur

In addition, the rules address insurance, export and import clearance, and the
division of other costs pertaining to the delivery of goods between buyer and
seller.

INCOTERMS do not cover ownership or title to goods, details of payment

obligations, vessel requirements, termination, insolvency, etc. They do not
constitute a complete contract of sale. Yet they are incorporated by express
reference, or referred to in most international and many domestic sales contracts.
INCOTERMS are primarily relevant for companies involved in buying and
selling goods (not services) internationally. The rules, however, are beginning to
be incorporated into many domestic sales contracts as well.

Types of businesses which utilize INCOTERMS include:

• Trading companies, especially exporters and importers

• Marine and multimodal transport firms

• Logistics companies

• Financial services providing funding for trading companies

Purpose and Scope of Incoterms

a) Purpose
The purpose of Incoterms is, as stated by ICC “to provide a set of international rules for the
interpretation of the most commonly used trade terms in foreign trade. Thus, the uncertainties
of different interpretations of such terms in different countries can be avoided or at least
reduced to a considerable degree”.
Since international sales contracts are generally realized between the non-present parties from
different nationalities, it is very important how the parties interpret the terms and the
abbreviations commonly used in foreign trade. By this regulation of Incoterms, at least the
confusions and the differences of interpretation will be overcome and the conflicts arising out
of international trade will be reduced.
b) Scope
The scope of the Incoterms is limited to the rights and obligations of the parties’ arising from
the delivery of the sale of goods. Incoterms do not define the goods, but the goods should be
understood as commodities.
Incoterms do not regulate any contract other than sale contract. However, even in a sale
contract, Incoterms do not cover all the contractual aspects. The topics that Incoterms govern
can be gathered under four groups: (i) the delivery of goods, (ii) transfer of risks, (iii) division
of costs, and (iv) obligations concerning the documents. Incoterms do not provide rules for
the (i) payment and payment methods, (ii) transfer of ownership, (iii) variants, (iv) dispute
resolution and (v) other issues relating to fulfilment of the contract.
Here is the shortlist of the Incoterm definitions from the International Chamber of Commerce
that you should be familiar with:
Here is the legend that should be used
inconjunction with the diagrams displayed
with each Incoterm. This legend indicates
the balance of risks and costs for both the
buyer and seller when entering into
international trade business during 2008
and 2009.

EXW “Ex Works”

The seller delivers when he places the goods at the disposal of the buyer at the seller's
premises or another named place (i.e. works, factory, warehouse, etc.) not cleared for export
and not loaded on any collecting vehicle. This term thus represents the minimum obligation
for the seller, and the buyer has to bear all costs and risks involved in taking the goods from
the seller's premises.
FCA "Free Carrier"

The seller delivers the goods, cleared for export, to the carrier nominated by the buyer at the
named place. It should be noted that the chosen place of delivery has an impact on the
obligations of loading and unloading the goods at that place. If delivery occurs at the seller's
premises, the seller is responsible for loading. If delivery occurs at any other place, the seller
is not responsible for unloading. This term may be used irrespective of the mode of transport,
including multimodal transport.

"Carrier" means any person who, in a contract of carriage, undertakes to perform or to

procure the performance of transport by rail, road, air, sea, inland waterway or by a
combination of such modes.

If the buyer nominates a person other than a carrier to receive the goods, the seller is deemed
to have fulfilled his obligation to deliver the goods when they are delivered to that person
FAS “Free Alongside Ship”

The seller delivers when the goods are placed alongside the vessel at the named port of
shipment. This means that the buyer has to bear all costs and risks of loss or damage of the
goods from that moment. The FAS term requires the seller to clear the goods for export.

FOB "Free on Board”

The seller delivers when the goods pass the ship's call at the named port of shipment. This
means that the buyer has to bear all costs and risks of loss of or damage to the goods from
that point. The FOB term requires the seller to clear the goods for export. This term can be
used only for sea or inland waterway transport. Many people use either FOB or CIF and
aren't sure of the exact differences. SourceJuice wrote an article To FOB of CIF That is The
Question which may be of assistance.

CFR "Cost and Freight"

The seller delivers when the goods pass the ship's rail in the port of shipment. The seller must
pay the costs and freight necessary to bring the goods to the named port of destination but the
risk of loss of or damage to the goods, as well as any additional costs due to events occurring
after the time of delivery, are transferred from the seller to the buyer. The CFR term requires
the seller to clear the goods for export.

CIF “Cost Insurance and Freight"

The seller delivers when the goods pass the ship's rail in the port of shipment. The seller must
pay the costs and freight necessary to bring the goods to the named port of destination, but
the risk of loss of or damage to the goods, as well as any additional costs due to events
occurring after the time of delivery, are transferred from the seller to the buyer.

However, with CIF the seller also has to procure marine insurance against the buyer’s risk of
loss of or damage to the goods during the carriage. Consequently, the seller contracts for
insurance and pays the insurance premium. The buyer should note that under the CIF term the
seller is required to obtain insurance only on minimum coverage. Should the buyer wish to
have protection of greater coverage, he would either need to agree as much expressly with the
seller or to make his own extra insurance arrangements.

The CIF term requires the seller to clear the goods for export. This term can be used only for
sea and inland waterway transport. If the parties do not intend to deliver the goods across the
ship's rail, the CIP term should be used.
CIP "Carriage and Insurance paid to..."

The seller delivers the goods to the carrier nominated by him but the seller must in addition
pay the cost of carriage necessary to bring the goods to the named destination. This means
that the buyer bears all risks and any additional costs occurring after the goods have been
delivered. However, in CIP the seller also has to procure insurance against the buyer's risk of
loss of or damage to the goods during the carriage.

Consequently, the seller contracts for insurance and pays the insurance premium. The buyer
should note that under the CIP term the seller is required to obtain insurance only on
minimum coverage. Should the buyer wish to have the protection of greater cover, he would
either need to agree as much expressly with the seller or to make his own extra insurance
arrangements.

"Carrier" means any person who, in a contract of carriage, undertakes to perform or to

procure the performance of transportation by rail, road, air, sea, inland waterway or by a
combination of such modes.
If subsequent carriers are used for the carriage to the agreed destination, the risk passes when
the goods have been delivered to the first carrier. The CIP term requires the seller to clear the
goods for export

CPT “Carriage paid to..."

The seller delivers the goods to the carrier nominated by him but the seller must in addition
pay the cost of carriage necessary to bring the goods to the named destination. This means
that the buyer bears all risks and any other costs occurring after the goods have been so
delivered.

'Carrier" means any person who, in a contract of carriage, undertakes to perform or to procure
the performance of transport, by rail, road, air, sea, inland waterway or by a combination of
such modes.

If subsequent carriers are used for the carriage to the agreed destination, the risk passes when
the goods have been delivered to the first carrier, The CPT term requires the seller to clear the
goods for export.

DAF "Delivered at Frontier"

The seller delivers when the goods are placed at the disposal of the buyer on the arriving
means of transport not unloaded, cleared for export, but not cleared for import at the named
point and place at the frontier, but before the customs border of the adjoining country. The
term "frontier" may be used for any frontier including that of the country of export.
Therefore, it is of vital importance that the frontier in question be defined precisely by always
naming the point and place in the term.
However, if the parties wish the seller to be responsible for the unloading of the goods from
the arriving means of transport and to bear the risks and costs of unloading, this should be
made clear by adding explicit wording to this effect in the contract of sale.

DES “Delivered Ex Ship”

Means that the seller delivers when the goods are placed at the disposal of the buyer on board
the ship not cleared for import at the named port of destination. The seller has to bear all the
costs and risks involved in bringing the goods to the named port of destination before
discharging. If the parties wish the seller to bear the costs and risks of discharging the goods,
then the DEQ term should be used.

This term can be used only when the goods are to be delivered by see or Inland waterway or
multimodal transport on a vessel in the port of destination.

DEQ “Delivered Ex Quay”

The seller delivers when the goods are placed at the disposal of the buyer not cleared for
import on the quay (wharf) at the named port of destination. The seller has to bear costs and
risks involved in bringing the goods to the named port of destination and discharging the
goods on the quay (wharf). The DEQ term requires the buyer to clear the goods for import
and to pay for all formalities, duties, taxes and other charges upon import.

If the parties wish to include in the seller's obligations all or part of the costs payable upon
import of the goods this should be made cear by adding explicit wording to this effect in the
contract of sale.

This term can be used only when the goods are to be delivered by sea or inland waterway or
multimodal transport on discharging from a vessel onto the quay (wharf) in the port of
destination. However if the parties wish to include in the seller's obligations the risks and
costs of the handling of the goods from the quay to another place (warehouse, terminal,
transport station, etc.) in or outside the port, the DDU or DDP terms should be used.
DDU “Delivered Duty Unpaid”

The seller delivers the goods to the buyer, not cleared for import, and not unloaded from any
arriving means of transport at the named place of destination. The seller has to bear the costs
and risks involved in bringing the goods thereto, other than, where applicable, any "duty"
(which term includes the responsibility for and the risks of the carrying out of customs
formalities, and the payment of formalities, customs dudes, taxes and other charges) for
import in the country of destination. Such "duty" has to be borne by the buyer as well as any
costs and risks caused by his failure to clear the goods for import in time. However, if the
parties wish the seller to carry out customs formalities and bear the costs and risks resulting
there from as well as some of the costs payable upon import of the goods should be made
clear by adding explicit wording to this effect in the contract of sale
DDP "Delivered Duty Paid”

The seller delivers the goods to the buyer, cleared for import, and not unloaded from any
arriving means of transport at the named place of destination. The seller has to bear all the
costs and risks involved in bringing the goods thereto including, where applicable, any "duty”
(which term includes the responsibility for and the risks of the carrying out of customs
formalities and the payment of formalities, customs duties, taxes and other charges) for
import in the country of destination.

Whilst the EXW term represents the minimum obligation for the seller, DDP represents the
maximum obligation. This term should not be used if the seller is unable directly or indirectly
to obtain the import licence. However, if the parties wish to exclude from the seller's
obligations some of the costs payable upon import of the goods (such as value-added tax :
VAT), this should be made cear by adding explicit wording to this effect in the contract of
sale. If the parties wish the buyer to bear all risks and costs of the import, the DDU term
should be used.

Latest Revision of the ICC Rules Contains a Number of Important Changes

On January 1, 2011, INCOTERMS 2010 will replace INCOTERMS 2000, the

current version of the ICC's International Commercial Terms. Since the
introduction of INCOTERMS by the International Chamber of Commerce in
1939, the rules have undergone eight revisions in an effort to keep pace with the
rapid expansion in global trade

INCOTERMS 2010

Need for Changes

It is stated under the Foreword of Incoterms® 2010, since the creation of the Incoterms rules
by ICC in 1936, this globally accepted contractual standard has been regularly updated to
keep pace with the development of international trade.

It is also stated that the continued spread of customs-free zones, the increased use of
electronic communications in business transactions, the heightened concern about security in
the movement of goods and changes in transport practices required the ICC to revise the
Incoterms 2000.

Moreover, the urge of the traders to commonly use Incoterms rules for purely domestic sale
contracts within the boundaries of countries or trade blocks like EU and the greater
willingness in the United States to use Incoterms rules in domestic trade rather than the
former Uniform Commercial Code shipment and delivery terms also motivated ICC to revise
Incoterms in a way that would enable the trade terms to be used also on domestic basis in
addition to its previous use on international basis.

Main Novelties

i) New Incoterms Rules

First of all, the number of Incoterm rules has been reduced to 11 from 13.
Two new rules that may be used irrespective of the agreed mode of transport being namely
(1) DAT (Delivered at Terminal) and (2) DAP (Delivered at Place) replace the Incoterms
2000 rules DAF, DES, DEQ and DDU. Both of the new rules provide for delivery to occur at
a named destination. In DAT, the delivery occurs at the buyer’s disposal unloaded from the
arriving vehicle. In DAP, it occurs at the buyer’s disposal, ready for unloading. These new
rules, like their predecessors, are “delivered”, with the seller bearing all the costs, other than
those related to import clearance, where applicable, and risks involved in bringing the goods
to the named place of destination.

ii) Classification of Incoterms

Under the previous version of 1990 and 2000 of Incoterms, the rules were classified under
four groups as;

• “E” Group consisting of “Ex Works: EXW”,

• “F” Group consisting of “FCA, FAS and FOB”,
• “C” Group consisting of “CFR, CIF, CPT and CIP”, and
• “D” Group consisting of “DAF, DES, DEQ, DDU and DDP”.
Incoterms® 2010 prefers a completely different distinction and a classification system based
on modes of transport each Incoterms could be used for. Under the new classification, there
are two groups as;

• Group 1: Rules for any mode or modes of transport consisting of EXW, FCA,
CPT, CIP, DAT, DAP and DDP; and
• Group 2: Rules for sea and inland waterway transport consisting of FAS, FOB,
CFR and CIF.
The first group includes the seven Incoterms® 2010 rules that can be used irrespective of the
mode of transport selected and irrespective of whether one or more than one mode of
transport is employed.

In the second group, the point of delivery and the place to which the goods are carried to the
buyer are both ports. Under FOB, CFR and CIF all mention of the ship’s rail as the point of
delivery in the previous versions of Incoterms has been omitted in preference for the goods
being delivered when they are “on board” of the vessel. ICC states that this approach more
closely reflects modern commercial reality and avoids the rather outdated image of the risk
swinging to and across an imaginary perpendicular line.

iii) Electronic Communication

Incoterms 2010 grant electronic means of communication the same effect as paper
communication, as long as the parties so agree or where customary under Articles A1/B1 of
each Incoterm. It is emphasized by ICC that this formulation facilitates the evolution of new
electronic procedures throughout the lifetime of the Incoterms 2010 rules.

iv) Insurance Cover

There are only two terms which provide an insurance obligation for the parties. CIP and CIF
refer to Institute Cargo Clauses as to the coverage of the insurance. Institute Cargo Clauses
were subject to a revision which started on 2006 and finalized on 2009. The Incoterms 2010
rules take account of the Institute Cargo Clauses 2009.

The Incoterms 2010 rules provide for information duties relating to insurance in articles
A3/B3, which deal with contracts of carriage and insurance.

v) Security related clearances

ICC paid attention to the heightened concern about security in the movement of goods,
requiring verification that the goods do not pose a threat to life or property for reasons other
than their inherent nature in the new version of Incoterms 2010. Therefore, ICC have
allocated obligations between the buyer and seller to obtain or to render assistance in
obtaining security-related clearances, such as chain-of-custody information, in articles A2/B2
and A10/B10 of various Incoterms rules.

vi) Terminal Handling Charges

The Incoterms 2010 rules seek to avoid multiple payments of terminal handling charges by
the buyer. Under Incoterms 2000 CPT, CIP, CFR, CIF, DAT, DAP, and DDP, the seller must
make arrangements for the carriage of the goods to the agreed destination. While the freight
is paid by the seller, it is actually paid for by the buyer as freight costs are normally included
by the seller in the total selling price.
The carriage costs will sometimes include the costs of handling and moving the goods within
port or container terminal facilities and the carrier or terminal operator may well charge these
costs to the buyer who receives the goods.

In these circumstances, the buyer would want to avoid paying for the same service twice:
once to the seller as part of the total selling price and once independently to the carrier or the
terminal operator. The Incoterms 2010 clearly allocate terminal handling costs in articles
A6/B6 of the relevant Incoterms rules.

vii) String Sales

During the sale of commodities, goods in subject are frequently sold several times during
transit “down a string”. ICC notes that a seller in the middle of the string does not “ship” the
goods because these have already been shipped by the first seller in the string. The seller in
the middle of the string therefore performs its obligations towards its buyer not by shipping
the goods, but by “procuring” goods that have been shipped.
Incoterms 2010 rules includes the obligation to “procure goods shipped” as an alternative to
the obligation to ship goods in the relevant Incoterms rules.

c. Significant issues that must be taken into consideration when using Incoterms 2010
Not only uniform interpretation of Incoterms is significant but also being well informed about
Incoterms in order to be able to choose the appropriate Incoterm rules convenient for the
particular transaction between them is rather important for the parties. Therefore, while
incorporating the Incoterms 2010 rules into their contract, parties must carefully read the
rules and the guidelines that are placed before each Incoterm. The mentioned guidelines
explain the fundamentals of each Incoterm rule and try to assist the users to accurately and
efficiently choose the appropriate Incoterm rule for that particular transaction.
It is also very important to specify the place or port as precisely as possible in order for
chosen Incoterm rule to be able to work and to avoid the parties to face unexpected duties to
be borne on them.
As a last remark, as stated under Section II (B) (1) (b) above, Incoterm rules do not regulate
every aspect of a commercial relationship and do not give the parties a complete contract of
sale. Therefore, parties should deal with through express terms in the contract of sale or in the
law governing that contract as to issues not covered by Incoterms.
The parties should also be aware that mandatory local law may override any aspect of the sale
contract, including the chosen Incoterms rule.
Incoterms 2010 Rules have been launched on September 2010 and will enter into force
officially on 1st January 2011. Until the entry in force of Incoterms 2010, the parties are free
to use either Incoterms 2000 or Incoterms 2010. After 1st January 2011, unless otherwise
stated by the parties, all references to Incoterms rules will be deemed to be made to Incoterms
2010. As any new version of Incoterms does not cancel the old versions, it is recommended
to the parties to clearly set forth in their contract to which version of the Incoterms rules they
refer to.An international committee of eight legal and international business
experts appointed by the ICC, drafted the revisions to the current rules
represented in INCOTERMS 2010. During the 2.5 year revision process, the
committee considered more than two thousand recommendations from 130+ ICC
member countries.

As a result, INCOTERMS 2010 was published on September 27, 2010 and will
take effect on January 1, 2011.

The goal of the new INCOTERMS is to simplify the drafting of sales contracts
by clearly defining some of the obligations of both buyers and sellers, thus
avoiding misunderstandings, which might otherwise occur.

The 2010 revision recognizes the significant changes that have occurred in
global trade since 2000, including:

• Post 9/11 cargo security regulations

• 2004 revision of the U.S. Uniform Commercial Code

• New Institute Cargo Clauses

• Increase in electronic communications

• Delivery, with respect to revenue recognition compliance

• Spread of customs free zones

• Increasing development of trade blocs (e.g. the European Union) where

border formalities have largely disappeared
When INCOTERMS 2010 Applies

• Existing sales contracts: INCOTERMS 2000 will continue to apply, even

if performance of the contract will be made in 2011.
• Sales contracts entered into between September and December 2010:
Either the 2000 or 2010 versions can be used. The version the parties
agree to utilize, however, should be expressly stated in the sales contract.
• Sales contracts drafted after January 1, 2011: Any reference to
“INCOTERMS” will be assumed to mean INCOTERMS 2010.

Key Changes Addressed in INCOTERMS 2010

The new INCOTERMS expressly state (on the front page) that they can be used
for “both domestic and international trade.” The previous version did not refer
directly to domestic sales.

The 2000 version of INCOTERMS had four classes: E, F, C, and D.

INCOTERMS 2010 separates the terms into two groups: those that apply to all
modes of transportation and those applying only to sea and inland waterway
transport.

The 2010 version adds two new INCOTERMS – DAP (delivered at place) and
DAT (delivered at terminal) to replace DEQ (delivered ex quay - duty paid).
These were introduced to take into account new practices in containerization and
point-to-point deliveries. The two new terms can be used for any agreed mode of
transportation including sea, air, road, and rail.

Four INCOTERMS were deleted: DAF (delivered at frontier), DES (delivered ex

ship), DEQ (delivered ex quay) and DDU (delivery duty unpaid).

Some other key changes:

• Express reference made to the use of “equivalent electronic records”,

instead of assuming only hard copies would be utilized.
 • Amendment to insurance cover to reflect changes in Institute Cargo
Clauses.

• Allocation of each party’s obligations regarding information required to

obtain security-related clearances.

• Expressly allocated responsibility for terminal handling charges.

Two categories of INCOTERMS 2010

The definitions of the terms (below) are paraphrased from various sources and
are not intended as complete, legal or binding definitions. There are a number of
organizations offering courses and/or books on INCOTERMS 2010. Before
making any changes to your sales contracts, please contact a lawyer or other
professional with experience in international trade and INCOTERMS.

Incoterms for any Mode or Modes of Transport:

• EXW - Ex Works
• FCA - Free Carrier
• CPT - Carriage Paid To
• CIP - Carriage and Insurance Paid
• DAT - Delivered At Terminal (new)
• DAP - Delivered At Place (new)
• DDP - Delivered Duty Paid

Incoterms for Sea and Inland Waterway Transport Only:

• FAS - Free Alongside Ship

• FOB - Free On Board
• CFR - Cost and Freight
• CIF - Cost, Insurance and Freight

The reduction in Incoterms from 13 to 11 different terms was accomplished by substituting

two new Incoterms, DAT (Delivered at Terminal) and DAP (Delivered at Place), for
DAF (Delivered at Frontier), DES (Delivered Ex-Ship), DEQ (Delivered Ex-Quay) and DDU
(Delivered Duty Unpaid).
DAT New Term - May be used for all transport modes
(Delivered Seller delivers when the goods, once unloaded from the arriving means of
At Terminal) transport, are placed at the disposal of the buyer at a named terminal at the
named port or place of destination. "Terminal" includes quay, warehouse,
container yard or road, rail or air terminal. Both parties should agree the
terminal and if possible a point within the terminal at which point the risks
will transfer from the seller to the buyer of the goods. If it is intended that the
seller is to bear all the costs and responsibilities from the terminal to another
point, DAP or DDP may apply.

Responsibilities

• Seller is responsible for the costs and risks to bring the goods to the
point specified in the contract
• Seller should ensure that their forwarding contract mirrors the contract
of sale
• Seller is responsible for the export clearance procedures
• Importer is responsible to clear the goods for import, arrange import
customs formalities, and pay import duty

• If the parties intend the seller to bear the risks and costs of taking the
goods from the terminal to another place then the DAP term may
apply
DAP New Term - May be used for all transport modes
(Delivered Seller delivers the goods when they are placed at the disposal of the buyer on
At Place) the arriving means of transport ready for unloading at the named place of
destination. Parties are advised to specify as clearly as possible the point
within the agreed place of destination, because risks transfer at this point from
seller to buyer. If the seller is responsible for clearing the goods, paying duties
 etc., consideration should be given to using the DDP term.

Responsibilities

• Seller bears the responsibility and risks to deliver the goods to the
named place
• Seller is advised to obtain contracts of carriage that match the contract
of sale
• Seller is required to clear the goods for export
• If the seller incurs unloading costs at place of destination, unless
previously agreed they are not entitled to recover any such costs

• Importer is responsible for effecting customs clearance, and paying any

customs duties

Incoterms 2010 also addresses duties to provide information regarding security-related

clearances, such as Importer Security Filings and other chain-of-custody information.

Contrary to some predictions, Incoterm FAS remains in Incoterms 2010, since that Incoterm
is important in bulk and break-bulk trade.

Conclusion

INCOTERMS 2010 is expected to be well received by those firms with previous experience
with INCOTERMS. As with any revisions to “standard” practice, however, each firm that is
impacted by these changes must embrace them and assure that the necessary amendments are
made to their future sales contracts.