Shipping Terms Explained Easily

 

INCOTERMS (INCO means international commerce) are three-letter trade terms related to international sales practices. It is also known as shipping terms; the Incoterms rules were first published in 1936 and periodically updated.

INCOTERMS rules communicate the tasks, costs, and risks associated with the transportation and delivery of goods. Also, they are used to reduce or remove uncertainties arising from the different interpretations of the rules in many countries.

In addition, shipping terms (INCOTERMS) are accepted by countries' governments, legal authorities, and practitioners worldwide for the interpretation of the most commonly used terms (shipping terms) in international trade.

Shipping terms and rules ( for all modes) governing international commerce, which apply to the sale, transport, and delivery of goods.  Particularly, the purpose of the three-letter trade INCOTERMS used for any transport mode.

Furthermore, the most commonly used INCOTERMS (shipping terms) for air freight transportation.

How do incoterms inform the international sales contracts?

INCOTERMS inform the sales contract by defining the respective obligations involved in the delivery of goods from the seller (in Country A) to the buyer (in Country B). However, it's important to note that INCOTERMS do not constitute a contract, nor do they supersede the laws governing a contract.

Which obligations are specified by INCOTERMS (shipping terms)?

Shipping terms specify the obligations (control, risk, and cost ) on both the seller and buyer of goods, depending on the specific term chosen. Each term clarifies which party is responsible for:

1)           Inland freight (transportation within the origination country)

2)           Forwarder selection;

3)           Export clearance;

4)           Carrier selection and scheduling;

5)           International freight;

6)           Import clearance: and

7)           On-carriage (transportation within the destination country).

Delivery occurs and the risk of loss transfers from the seller to the buyer at the point designated by the term selected.

Shipping Terms / Incoterms Rules for any Mode(S) of Transport

In this list, I will include the 7 incoterms (shipping terms) which apply to any transport mode.

EX Works Shipping Terms - ( EXW Named Place of Delivery)

One of the simplest shipment arrangements places the minimum responsibility on the seller and greater responsibility on the buyer. in the EX-WORKS transaction, the seller delivers goods to the buyer's premises usually by releasing them to the buyer's freight forwarder. The seller also pays for freight up to the buyer's premises. The buyer bears the full costs and risks of moving the goods to their final destination making arrangements for insurance and import or export clearance as necessary.

FCA Shipping Terms - Free Carrier (named place of delivery)

In this type of transaction, the seller delivers the goods cleared for export, into the charge of the carrier named by the buyer at the named place or point. The seller is responsible for all risks and costs up to the delivery point. From that point onward the buyer bears the costs and risks of moving the goods to their destination, including customs, insurance, and delivery costs.

 

CPT Shipping Terms - Carriage Paid to (named place of destination)

in a CPT arrangement, the transfer of risk from the seller to the buyer occurs once the goods have been delivered into the custody of the first carrier. The seller contracts at his own expense for the carriage of the goods and delivers the goods, cleared for export, to the first carrier.

CPT Shipping Terms, also the seller pays for transporting goods to their destination. Once the goods are transferred to the first carrier, the buyer bears the risks of loss or damage. The buyer is also responsible for clearing the goods for import and paying freight to the named destination point.

 

 

CIP Shipping Terms - Carriage and Insurance Paid to (named place of destination)

The CIP arrangement is similar to the CPT arrangement. However, the seller also buys cargo insurance against the buyer's risk of loss or damage of goods during carriage to the named destination. The seller carries all costs and risks until the goods are delivered to the first carrier.

The buyer should note that under the CIP term the seller is required to obtain insurance only on minimum coverage. The CIP term requires the seller to clear the goods for export.

 

 

DPU Shipping Terms - Delivered at Place Unloaded (named place of destination)

The seller delivers goods unloaded at the buyer’s premises. Risk is transferred as soon as goods have been unloaded.

 

 

DAP Shipping Terms - delivery at the place (named place of destination)

The seller is deemed to have delivered the goods when they are placed at the buyer's disposal on the arriving means of transport ready for unloading at the named place of destination. The seller bears all risks involved in transporting the goods to the name destinations.

 

 

DDP Shipping Terms - delivery duty paid (named place of destination)

Under the DDP arrangement, the seller assumes the maximum obligations, including clearing goods for import. The seller arranges for the transport of goods at his own expense and completes all customs requirements for import and export. The seller also carries all risks until the goods are delivered at the name destination. The buyer assumes risks and costs once the goods reach the delivery point.

While the EXW term represents the minimum obligation for the seller, DDP represents the maximum.

 

 

Additional Shipping Terms for Sea and Inland Waterways

FAS Shipping Terms - Free Alongside Ship (Named Port of Shipment)

FAS Term means the seller fulfills his obligation to deliver when the goods have been placed alongside the vessel on the quay or in lighters 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 moment.

 

 

FOB Shipping Terms - Free on Board (named port of shipment)

Under FOB terms the seller bears all costs and risks up to the point the goods are loaded onboard the vessel. The seller must also arrange for export clearance. The buyer pays the cost of marine freight transportation, bill of lading fees, insurance, unloading, and transportation cost from the arrival port to destination.

Note: Since Incoterms 1980 introduced the FCA incoterm, FOB should only be used for non-containerized sea freight and inland waterway transport. However, FOB is still used for all modes of transport despite the contractual risks that this can introduce.

 

CFR Shipping Terms - Cost and Freight (named port of shipment)

CFR Term, the seller pays 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 (continued) well as any additional costs due to events occurring after the time the goods have been delivered on board the vessel, is transferred from the seller to the buyer when the goods pass the ship’s rail in the port of shipment. The CFR term requires the seller to clear the goods for export.

If the buyer does require the seller to obtain insurance, the Incoterm CIF should be considered. CFR should only be used for non-containerized sea freight and inland waterway transport; for all other modes of transport, it should be replaced with CPT.

 

 

CIF Shipping Terms – Cost, Insurance, and Freight (named port of shipment)

CIF Term, the seller has the same obligations as under the CFR but also has to procure marine insurance against the buyer’s risk of loss or damage to the goods during the carriage. The seller contracts for insurance and pays the insurance premium. The CIF term requires the seller to clear the goods for export.

The policy should be in the same currency as the contract. CIF should only be used for non-containerized sea freight; for all other modes of transport, it should be replaced with CIP.

 

Incoterms Used in Airfreight Transportation

Concerning airfreight transportation, the most commonly used terms are

FOB Shipping Terms - Free on Board (airport of origin)

The seller (the shipper) pays for all charges up until the cargo has been delivered to the airport of origin.

 

In the case of the FOB term, the airline collects the airfreight charges from the buyer (consignee).  This service is provided by the airline, and they reserve the right to revert charges to the seller (the shipper) the airline is unable to collect freight charges from the buyer. Alternatively, the airline may ask the seller (the shipper) to exercise his right of disposition, to have the shipment returned, destroyed, or delivered to a different buyer.

CIF Shipping Terms – Cost, Insurance, and Freight (named port of shipment)

The shipper pays for the same charges as for the FOB term plus the airfreight to the airport of destination, excluding terminal charges at destination.

In the case of CIF term, the seller (the shipper) is always prepaying the airfreight charges up to the destination, while the airline collects only charges for delivery and storage (if any) at the airport of destination.

 

Note: The definitions of FOB/CIF Terms are slightly different when used in connection with see freight)

In any case, either the FOB or CIF the shipper is always legally responsible for payment to the airline when an airwaybill has been issued.

On the air waybill:

 

-  The FOB – Shipment is marked as CC (charges collect)

-  The CIF – shipment is marked as PP (prepaid)

 

Service offered by airlines is normally a reflection of how trade is being carried out. They also reflect the payment terms and conditions.