Trade Terms and Incoterms
1. Trade Terms: Overview
Trade terms are standard expressions used in international trade to clarify the rights, obligations,
costs, and risks of buyers and sellers in the delivery of goods. These terms simplify
communication between parties and ensure mutual understanding of responsibilities. Examples
include concepts such as delivery points, insurance responsibilities, and payment arrangements.
Trade terms can vary based on industry practices or agreements between parties, but they often
align with standardized sets of terms like Incoterms.
Incoterms (International Commercial Terms) are globally recognized trade terms published by
the International Chamber of Commerce (ICC). First introduced in 1936 and updated
periodically (latest version: Incoterms 2020), they define the responsibilities of buyers and
sellers in international and domestic trade.
Incoterms address key aspects of trade, such as:
• Transportation of goods.
• Transfer of risk from seller to buyer.
• Allocation of costs, including shipping, insurance, and customs duties.
Obligations of the parties:
• General obligation of the seller/buyer
• Licenses, authorizations, security clearances and other formalities
• Contract of carriage and insurance
• Delivery
• Transfer of Risk
• Allocation of cost
• Notice to the buyer
• Delivery document
• checking , packing, marking
• Assistance with information and related costs
Key Features of Incoterms
• Standardized Framework: Provides clarity and reduces disputes by setting clear rules for
delivery and risk transfer.
• Neutral Applicability: Used across legal systems and countries, ensuring global compatibility.
• Mode of Transport: Some Incoterms apply to any mode of transport, while others are specific to
sea and inland waterway transport.
• Customizable: Can be adapted to suit specific agreements between buyers and sellers.
Classification of Incoterms
Incoterms are divided based on the point of delivery and transfer of risks.
Incoterms for Any Mode of Transport:
1. EXW (Ex Works):
o The seller makes goods available at their premises; the buyer bears all risks and costs
from there.
o Example: Buyer picks up goods from the seller's warehouse.
2. FCA (Free Carrier):
o The seller delivers goods to a carrier or another party nominated by the buyer at an
agreed location.
o Example: Seller delivers goods to a shipping company.
3. CPT (Carriage Paid To):
o The seller pays for transport to a named destination, but the buyer assumes risk after the
goods are handed over to the carrier.
o Example: Seller pays freight to the buyer's country, but risk passes at shipment.
4. CIP (Carriage and Insurance Paid To):
o Similar to CPT, but the seller also provides insurance against the buyer's risk during
transit.
5. DAP (Delivered at Place):
o The seller delivers goods to a specific destination; the buyer is responsible for import
duties and customs clearance.
6. DPU (Delivered at Place Unloaded):
o The seller delivers goods at the destination and unloads them; the buyer handles customs
and import duties.
7. DDP (Delivered Duty Paid):
o The seller delivers goods to the buyer's location, paying for all costs, including customs
duties.
Incoterms for Sea and Inland Waterway Transport:
1. FAS (Free Alongside Ship):
o The seller delivers goods alongside the ship; the buyer assumes risk and costs from that
point.
o Example: Goods placed at the port next to the vessel.
2. FOB (Free On Board):
o The seller delivers goods on board the ship; the buyer assumes risk and costs once goods
are loaded.
o Example: Seller loads goods onto the ship at the port.
3. CFR (Cost and Freight):
o The seller pays for transport to the destination port, but the buyer assumes risk once
goods are loaded on the ship.
o Example: Seller ships goods to the buyer's port.
4. CIF (Cost, Insurance, and Freight):
o Similar to CFR, but the seller also provides insurance to cover the buyer’s risk during
transit.
Key Differences Between Incoterms
Term Risk Transfer Point Cost Paid by Seller
EXW At the seller's premises None
FCA At the carrier chosen by the buyer Loading and delivery to the carrier
CPT/CIP At the first carrier's point Transportation (and insurance for CIP)
DAP/DPU At the buyer's named destination Transportation (and unloading for DPU)
DDP At the buyer's named destination All costs, including customs duties
FAS Alongside the ship at the port of shipment Delivery to the port
FOB On board the ship Loading onto the ship
CFR/CIF On board the ship Transport (and insurance for CIF)
Practical Importance of Incoterms
1. Clarity in Responsibilities: Clearly defines who is responsible for shipping, insurance, and
customs duties.
2. Reduces Disputes: Minimizes misunderstandings and disputes over delivery, risk, and costs.
3. Efficiency in Trade: Facilitates smooth trade transactions by providing a universally recognized
framework.
4. Flexibility: Can be applied in different legal systems and for various types of transport.
Common Misconceptions About Incoterms
• Incoterms Are Not Contracts: They supplement contracts but do not serve as contracts
themselves.
• Incoterms Do Not Cover All Risks: They primarily address delivery, risk, and cost allocation,
not issues like payment terms or title transfer.
• Not All Terms Are Suitable for All Modes of Transport: For example, FOB is specific to sea
transport, whereas FCA is used for multimodal transport.
Conclusion
Trade terms, including Incoterms, are essential tools in international commerce, providing
clarity and predictability in the allocation of costs, risks, and responsibilities. Understanding the
nuances of each term ensures smooth business transactions, reduces disputes, and fosters
efficient global trade operations.
