GUIDE TO: Incoterms
When global companies enter into contracts to buy and sell goods they are free to negotiate specific terms. These terms include the price, quantity, and characteristics of the goods. Every international contract may also contain what is referred to as an Incoterm, or international commercial term.
Incoterms are not laws but precise definitions of the costs, risks and obligations of both parties (the seller and the buyer) in a contract where an international transaction takes place. Applying these terms to sale and purchase contracts makes global trade easier and helps partners in different countries understand one another.
Note that when we refer to the ‘seller’ it means the seller, manufacturer or exporter, and when we refer to the ‘buyer’ we mean the buyer or importer.
The parties to the transaction select the Incoterm, which determines who pays the cost of each transportation segment, who is responsible for loading and unloading of goods, and who bears the risk of loss at any given point during an international shipment.
Incoterms are not mandatory and therefore not implied by default in an international sales contract. If a contractor wants to use them, they must be specifically included in the contract.
International Commercial Terms are revised periodically. The current version is called Incoterms 2020. All contracts made under Incoterms 2010 (the previous version) remain valid. Although we recommend using the most current version, parties can agree to choose any version of the Incoterms rules. It is important, however, to clearly specify which version you have chosen.
Below is a summary of what Incoterms 2020 entail. Click the image for a downloadable PDF you can keep handy when negotiating your international deals.
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Ex Works (EXW)
- Works with any mode of transport.
- Applicable where there is more than one mode of transport.
Seller
Must make sure that the goods are:
- Available;
- Suitably packaged; and
- At the specified place (this is usually the seller’s factory/storage area)
Buyer
Is responsible for:
- Collecting the goods from the seller and carriage.
- Loading the goods onto the collecting vehicle.
- Export clearance.
Look out for
- The seller does not have to load the goods, but if he does so, it is at the buyer’s risk and request.
- The buyer is responsible for export clearance in a foreign Customs area.
Free Carrier (FCA)
- Works with any mode of transport.
- Applicable where there is more than one mode of transport.
Seller
- Loads the goods at their own premise onto a vehicle supplied by the buyer;
- OR delivers the goods to a carrier selected by the buyer, still on the vehicle of delivery.
- Clears the goods for export.
Buyer
- After goods have been delivered to the carrier, the buyer bears the costs and risks of moving the goods to the final destination.
Look out for
- FCA is the rule of choice for containerised goods where the buyer arranges for the main carriage.
- FCA is the only Incoterms rule where delivery can happen in two different ways, so be specific about the point of delivery in the sales agreement.
Free Alongside Ship (FAS)
- Only works with goods transported by sea or inland waterway.
Seller
- The seller delivers the goods (once cleared for export) to the port of origin alongside the vessel.
Buyer
- After seller delivers alongside the vessel, the buyer bears all costs and risks of loss or damage.
- The buyer is responsible for loading the goods.
Look out for
- FAS does not work with delivery to a container depot as the goods cannot be placed alongside a vessel (ship). For containerised goods, consider FCA instead.
Free On Board (FOB)
- Only works with goods transported by sea or inland waterway.
Seller
- Delivers the goods on board the ship and clears the goods for export.
Buyer
- After the seller delivers the goods on board the ship and clears the goods for export, the buyer bears all costs and risks of loss or damage.
Look out for
- FOB does not work with delivery to a container depot as the goods cannot be placed on a vessel (ship). For containerised goods, consider FCA instead.
Cost And Freight (CFR)
- Only works with goods transported by sea or inland waterway.
Seller
- Clears the goods for export and pays the costs of moving the goods to final destination. The risk transfers as soon as the goods are handed over to a carrier.
Buyer
- After the seller delivers the goods on board the ship and clears the goods for export, the buyer bears the risk of loss or damage.
Look out for
- The seller is not responsible for insurance of the goods on the main carriage.
- For containerised goods, consider CPT instead.
Cost Insurance And Freight (CIF)
- Only works with goods transported by sea or inland waterway.
Seller
- Clears the goods for export and pays the costs of moving the goods to final destination; and
- Purchases the cargo insurance in accordance to Clause C as stipulated by the Institute Cargo Clauses. However, the buyer must be the insured party.
Buyer
- Bears all risk of loss or damage once the goods have been loaded on board the ship.
Look out for
- Although the seller is responsible for the cargo insurance, the rule only requires a minimal level of cover, which might not provide sufficient cover depending on the shipment.
- For containerised goods, consider CIP instead.
Carriage Paid To (CPT)
- Applicable to any mode of transport.
- Applicable where there is more than one mode of transport.
Seller
- Is responsible for arranging the carriage to the named place.
- Is NOT responsible for insuring goods to the named place.
Buyer
- From the time the goods are transferred to the first carrier, the buyer bears the risk of loss or damage.
Look out for
- Terminal handling charges (THC) are charges collected by terminal authorities at each port against handling equipment and maintenance. The buyer should find out whether these charges have been added to the carrier’s freight rates, so as to avoid any unforeseen costs.
- Where there are multiple contracts of carriage (if one carrier hands over to another along the journey), the sales agreement must specify at which point risk transfers to the buyer – when the goods are handed over to the first or second carrier.
Carriage And Insurance Paid To (CIP)
- Applicable to any mode of transport.
- Applicable where there is more than one mode of transport.
Seller
Responsible for:
- Arranging carriage to the named place; and
- Insuring the goods according to Clause A as stipulated by the Institute Cargo Clauses. However, the buyer must be the insured party.
Buyer
- Bears the risk of loss or damage from the time the goods are transferred to the first carrier.
Look out for
- Terminal handling charges (THC) are charges collected by terminal authorities at each port against handling equipment and maintenance. The buyer should find out whether these charges have been added to the carrier’s freight rates, so as to avoid any unforeseen costs.
- With 2010 incoterms, the seller is only required to provide a minimal level of cover, which might not be sufficient. 2020 incoterms specifies a higher bracket of insurance cover. Be clear about which version of CIP is applicable.
Delivered At Place Unloaded (DPU)
- Applicable to any mode of transport.
- Applicable where there is more than one mode of transport.
Seller
- Delivers when the goods, once unloaded from the arriving means of transport, are placed at the buyer’s disposal either at a named terminal, at a named port or at a named place of destination.
- Bears all risk involved in bringing the goods to, and unloading them at, the named terminal, port or place of destination.
Buyer
- Bears risk only after the goods have been unloaded.
- Is responsible for import clearance, and any applicable local taxes or import duties.
Look out for
- Many of the ports are very large, therefore it is important to clearly specify the place for delivery.
- Parties should clarify who would bear the costs of terminal handling charges (THC) if they apply.
- If the named place of delivery falls after import clearance, the seller carries the risk and cost of a Customs delay until the buyer has cleared the goods for import.
Delivered At Place (DAP)
- Applicable to any mode of transport.
- Applicable where there is more than one mode of transport.
Seller
- Arranges carriage and delivery of the goods (that are ready for unloading form the arriving vehicle) at the named place.
- Bears all risks involved in delivering the goods to the named place.
Buyer
- Bears risk once the goods are available for unloading.
- Is responsible for import clearance, and any applicable local taxes or import duties.
Look out for
- This rule can be used in place of the Incoterms 2000 rules DAF, DES, and DDU.
Delivered Duty Paid (DDP)
- Applicable to any mode of transport.
- Applicable where there is more than one mode of transport.
Seller
- Delivers the goods cleared for import to the buyer at the destination.
- Bears all costs and risk of moving the goods to the final destination, including the payment of customs duties and taxes.
Buyer
- Bears risk once the goods are available for unloading.
Look out for
- DDP required the seller to clear the goods for import in a foreign Customs area.
- It is the only Incoterms rule that requires the seller to take responsibility for import clearance and payment of taxes and/or import duty.
- The South African VAT Act does not support DDP as it requires a foreign entity to pay import VAT to SARS.
