Who pays and who is liable? Incoterms bindingly define these two central issues in international freight forwarding and have been doing so for more than 80 years.
Silently, the container slowly hovers over the ship towards the quay wall. It’s something that goes well a thousand times, but this time it happens: The twistlocks slip out of the corner fittings of the container, which comes crashing down to the ground, wedging itself between the quay wall and the ship’s hold. It’s a large amount of property damage and an insurance claim – but for which? This is regulated in the run-up to a logistics order by the International Commercial Terms, or Incoterms for short. They form the basis for the interpretation of purchase and delivery contracts in international transport. Clauses concerning the costs of logistics, customs clearance at import and export, as well as the passing of risk are the most important points of the long-standing convention.
Drastic differences in commercial terms
The International Chamber of Commerce ICC was founded in Paris in 1920. Its stated goal was: improving the framework conditions for the global movement of goods and providing them with appropriate standards. This was necessary because the trade clauses of 30 states sometimes featured drastic differences.
It was not until 1936 that the first version of the International Commercial Terms was agreed upon. Since then, they have only been revised eight times. This underscores the fact that they are not hasty bureaucratic reactions. Instead, they are moderate adaptations to new conditions in transportation.
First and foremost, the Incoterm clauses govern purchase and delivery conditions in the international exchange of goods, because a purchase transaction depends upon a variety of parameters. They must be taken into account and ought to be clarified in advance. For example, transport costs: Who pays for them? The seller or the buyer? Or are they divided equally? Or the passing of risk: Who bears the risk in the event of damage or loss? Until what point does the insurance of the seller pay for possible transport damages and at what point is it the buyer’s contact person?
Rules, but not laws
Some of the Incoterms are multimodal, and some focus on maritime and inland navigation. The clauses are not laws. However, they can become binding if both parties include them in their purchase agreement.
The International Chamber of Commerce ICC is quite aware of the importance of the regulations and trademarked the name. The Incoterms were updated in 2020. Read all the important details in our White Paper Incoterms. Our experts explain why choosing the right Incoterm in the post-Brexit situation ist especially important.
- EXW: EX Works, from works with named location
- FCA: Free CArrier, free carrier with location of the named carrier
- FAS: Free Alongside Ship, FOB: Free On Board: stands for the named port of shipment
- CFR: Cost and Freight, costs and freight with indication of named port of destination
- CIF: Cost Insurance Freight, Costs, insurance, and freight means transfer of risk at the port of shipment and transfer of costs at the port of destination
- DAT: Delivered At Terminal, Delivery at named transfer terminal
- DAP: Delivered At Place, delivered to a named place in the importing country
- CPT: Carriage Paid To, CIP: Carriage Insurance Paid: Freight or freight and insurance paid to the named place of destination
- DDT: Delivered Duty Paid, delivered and duty paid to the named place of delivery in the importing country