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What Are Incoterms and Why Are They Important?

What Are Incoterms and Why Are They Important?

Have you ever wondered what people mean when they talk about FOB, CIP, DAT? Do not worry, this is not some alien language. Find out what it all means here.

19th March 2019

Have you ever come across abbreviations, such as EXW, DAP, CFR or CIS? If so, then you have used incoterms before. This article will give you the rundown of what incoterms are and how they work.

Incoterms are standard trade terms. They are used in contracts for the international sale of goods. Most countries use and know how to interpret incoterms. This helps to standardise worldwide trade.

Mostly, incoterms state which party bears the risk while goods are in transit. They also state who is responsible for loading, unloading, shipping, customs and insurance. Currently, the ICC (International Chamber of Commerce) has developed 11 incoterms. You will need legal advice to see which incoterms to include or exclude from your contract.

What Are the 11 Incoterms?

EXW (Ex-works)

Buyer takes on risk throughout the delivery process. Buyer must clear both export and import customs. Seller only has to ensure that goods are accessible for delivery.

DAP (Delivered At Place)

Seller covers delivery to buyer’s nominated address. Seller must clear export customs only. Risk stays with seller until goods are delivered. Buyer takes on risk once goods are at address, must pay import custom and is responsible for unloading goods.  

DDP (Delivered Duty Paid)

Seller pays all costs for transporting goods. This includes custom duties. Risk stays with seller until goods at the agreed address. Buyer takes on risk, once goods arrive and must unload them.

CIP (Carriage and Insurance Paid To)

Seller organises delivery to buyer’s carrier. Seller is responsible for insurance and must pay it. Buyer takes a risk when the carrier receives goods. Buyer pays for the remaining journey.  

DAT (Delivery At Terminal)

Seller covers the delivery cost to the terminal. Seller unloads cargo and pays export duty. Buyer clears import duty. Risk shifts to the buyer upon unloading of cargo.

FCA (Free Carrier)

Seller pays delivery cost to carrier and export duty. Buyer takes on risk when goods are delivered to the buyer’s carrier. Buyer is responsible for paying for the rest of the journey.

CPT (Carriage Paid To)

Seller pays for delivery to import address. Buyer’s carrier picks-up goods from address. Risk transfers to the buyer once the carrier receives goods.

FAS (Free Alongside Ship)

Seller is responsible for transporting cargo to the exporting port. Once the cargo is alongside the carrier’s ship, the buyer takes on risk and responsibility. Buyer pays for transport. FAS applies exclusively to maritime transport. It does not apply to multimodal transport, even if that transport includes maritime.

FOB (Free On Board)

Seller takes on risk until goods are on buyer’s carrier’s deck. Seller clears export duties. Buyer is responsible once goods on deck and must pay transport fees. Applicable only to maritime transport.

CFR (Cost and Freight)

Seller clears export duties and pays freight to the agreed destination port. Seller does not have to pay insurance. Once goods are on board ship, the risk shifts to the buyer, even though seller organises and pays for transport. Similarly to FOB and FAS, CFR is used for maritime transport only.  

CIF (Cost, Insurance and Freight)

Same as CFR, except seller must cover insurance, which must be purchased. Buyer responsible for goods once they are on deck.

Insurance

Generally, insurance is the bare minimum available on the market. If the buyer or seller wants better cover, then they must pay the difference for it. Usually, export/import contracts will have separate provisions covering insurance. Only CIF and CIP require the seller to pay insurance. Insurance is not a part of the other incoterms, but most parties will pay for insurance if carrying the risk.

Incoterms are standard and will appear on most templates. However, they certainly are not compulsory. You can have a transport contract that contains none of them. They are there for buyers and sellers to opt in or out of. For advice on how incoterms will affect you, contact a company lawyer.  

Want to know more? Contact a LawPath consultant on 1800 529 728 to learn more about Incoterms and to obtain a fixed-fee quote from Australia’s largest legal marketplace.

Author
Vincent Appleton

Vincent is a Legal Tech Intern at Lawpath as part of the Content Team. He is in the second year of his Juris Doctor law degree at Macquarie University. He is interested in both International Commercial Law and Criminal Law.