What are Incoterms? A guide to help your business

If you work in or are familiar with the freight industry, you may have heard of Incoterms ® – International Commercial Terms. But what exactly are they? Pinnacle Freight explains.

Incoterms ® are a series of commercial terms published by the International Chamber of Commerce to aid communication between buyers and sellers that helps to reduce confusion when discussing the terms of transactions. They were first put together back in 1936 and have since been amended nine times, the most recent version being ‘Incoterms® 2020’, published on September 10 2019.

Incoterms ® are a series of 3 letter trade terms that relate to all common contractual sales practices. For example, ‘DAP’. This stands for Delivered at Place and signals that the seller is now obligated to pay for loading, export customs clearance, freight and destination delivery, but not final destination import customs or unloading.

Why use Incoterms®?

The freight industry is fast moving and complex. It’s so important that all parties understand all the terms of any transaction to avoid mistakes and hold ups. Having pre-defined terms that can be instantly understood by all involved helps things to run smoothly.

Incoterms ® are used by trade councils, courts and international lawyers to define any transactions, logistics, transportation and all possible risks, costs and responsibilities in easy to understand terms. They are not compulsory and any contractual agreements will contain more details than just Incoterms ®, however they are legally binding when used in the context of a sales contract signed by the buying and selling parties. If you’re using Incoterms ® within a sales contract, you need to make this clear when writing it and also make sure you’re choosing the right terms for the situation, including insurance restrictions, consideration of local laws and infrastructure, and your relationship with the customer.

Full list of Incoterms® and their meanings

EXW – Ex Works (insert named place of delivery)

FCA – Free Carrier (insert named place of delivery)

CPT – Carriage Paid To (insert named place of delivery)

CIP – Carriage and Insurance Paid To (insert named place of destination)

DAP – Delivered at Place (insert named place of destination)

DPU – Delivered at Place Unloaded (insert named place of destination)

DDP – Delivered Duty Paid (insert named place of destination)

For sea and inland waterway transport:

FAS – Free Alongside Ship (insert named port of shipment)

FOB – Free on Board (insert named port of shipment)

CFR – Cost and Freight (insert named port of destination)

CIF – Cost Insurance and Freight (insert named port of destination)

Key terms used in Incoterms® 2020:

Carrier – the party to whom carriage is contracted

Customs formalities – compliance with customs regulations

Delivery – where the risk of loss or damage to goods passes from seller to buyer

Delivery document – document used to prove that delivery has occurred

Electronic record or procedure – one or more electronic messages equivalent to corresponding paper document

Packaging – in compliance with the contract or fit for transportation or stowage within a container or other means