International Commercial Terms

Understanding Incoterms 2020 for Smooth and Efficient Global Trade 

Incoterms, or International Commercial Terms, are a globally recognized set of rules established by the International Chamber of Commerce (ICC). They are the foundation of international trade, providing a standardized language and framework to define the responsibilities of buyers and sellers in cross-border transactions. Incoterms clearly specify who is responsible for costs, risks, and tasks associated with the shipment of goods, from the moment they leave the seller's factory to when they reach the buyer's destination. Using Incoterms helps prevent costly misunderstandings, streamlines trade processes, and ensures smoother, more efficient global commerce for businesses of all sizes. Mastering Incoterms is crucial for anyone involved in importing or exporting goods. 

Key Concepts:

• Defining Responsibilities: Incoterms clearly outline who is responsible for:

  • Transportation Costs: Paying for freight, shipping, and inland transport.

  • Insurance: Securing and paying for insurance coverage for goods in transit.

  • Customs Clearance: Handling export and import customs procedures.

  • Delivery Point: Specifying where the seller's responsibility for delivery ends and the buyer's begins.

• Risk Transfer: A critical aspect of Incoterms is defining the point at which risk of loss or damage to the goods transfers from the seller to the buyer. This point varies depending on the Incoterm chosen.

• Not Contract Law: Incoterms are not contracts themselves, but they are incorporated into sales contracts. They simplify contract negotiations by providing standardized terms.

• Choosing the Right Incoterm: Selecting the appropriate Incoterm depends on factors like:

  • Your business capabilities (buyer or seller).

  • The level of control you want over the shipping process.

  • The type of goods being shipped.

  • The relationship and agreement between buyer and seller.

Key Takeaway: Incoterms are essential for clear international trade agreements. They define responsibilities, especially regarding costs and risk, ensuring both buyers and sellers understand their obligations from origin to destination.

Detailed Explanations of Key Incoterms & Understanding Key Incoterms in Detail 

EXW (Ex Works) - (Most Buyer-Responsible Term) 

Ex Works (EXW) represents the minimum obligation for the seller. The seller's responsibility is essentially limited to making the goods available for pickup at their designated premises – be it a factory, warehouse, or other location. From that point onwards, the buyer assumes responsibility for absolutely everything. EXW offers the seller the least amount of hassle but places the maximum burden and control on the buyer.

Seller Responsibilities (Minimal):

• Prepare Goods & Packaging: Properly package the goods for export shipment.

• Make Goods Available: Make the packaged goods available for buyer collection at the seller's named premises (factory, warehouse, etc.) on the agreed date or within the agreed period.

• No Further Obligations: The seller is explicitly not obligated to:

  • Load the goods onto the buyer's transport vehicle.

  • Clear the goods for export customs.

Buyer Responsibilities (Extensive):

• Pickup and Transport: Arrange and pay for all transportation costs, from picking up the goods at the seller's premises to delivery at the final destination.

• Loading at Seller's Premises: Arrange and pay for loading the goods onto their chosen transport at the seller's designated pickup location.

• Export Customs Clearance: Handle and pay for all export customs formalities and documentation required in the seller's country. This can be complex and may require local expertise.

• Main Carriage & Insurance: Arrange and pay for the main international freight, as well as any insurance desired for the shipment.

• Import Customs Clearance: Handle and pay for all import customs procedures, duties, taxes, and other charges in the buyer's country.

• Inland Transport at Destination: Arrange and pay for inland transportation from the port/arrival point in the buyer's country to the final warehouse or destination.

• Risk Transfer Point: Risk of loss or damage to the goods transfers to the buyer as soon as the goods are made available at the seller's named premises. This is regardless of whether the buyer has actually picked up the goods yet.

(Suitability/Use Cases): EXW is typically used in scenarios such as:

• Domestic Trade (sometimes): Although designed for international, it can be used domestically.

• Buyer with Strong Local Logistics: When the buyer has a well-established logistics operation or a freight forwarder located in the seller's country, making it easy for them to manage pickup and export from origin.

• Buyer Desires Maximum Control: Buyers who want complete control over every aspect of the shipping process, from origin to destination.

Key Takeaway for EXW: EXW places the maximum responsibility and risk on the buyer. Sellers using EXW have minimal obligations, simply preparing goods for pickup. Buyers must be highly experienced in international shipping and customs to use EXW effectively.

FOB (Free On Board) - (For Sea and Inland Waterway Transport Only)

Free On Board (FOB) is specifically designed for sea and inland waterway transport. Under FOB terms, the seller is responsible for clearing the goods for export and delivering and loading them on board the vessel nominated by the buyer at the agreed port of shipment. Risk transfers from seller to buyer at this critical point – when the goods are safely loaded onto the ship. The buyer then takes over responsibility for the main carriage, insurance, and all costs and processes from the port of shipment onwards.

Seller Responsibilities:

• Prepare Goods & Packaging: Package the goods appropriately for sea transport and export.

• Export Customs Clearance: Handle and pay for all export customs procedures and documentation in the country of origin.

• Delivery to Port of Shipment: Transport the goods to the named port of shipment.

• Loading On Board: Load the goods on board the vessel nominated by the buyer at the port of shipment.

• Provide Proof of Delivery: Provide the buyer with the usual proof of delivery that the goods have been loaded on board (e.g., Bill of Lading).

Buyer Responsibilities:

• Main Carriage (Ocean Freight): Arrange and pay for the main carriage (ocean freight) from the port of shipment to the port of destination.

• Marine Insurance (Optional but Recommended): Arrange and pay for marine insurance to cover the goods during the main carriage (sea transit). While optional for FOB, it is highly advisable for the buyer to secure insurance as risk transfers at the port of shipment.

• Unloading at Destination Port: Arrange and pay for unloading the goods when they arrive at the destination port.

• Import Customs Clearance: Handle and pay for all import customs procedures, duties, taxes, and charges in the buyer's country.

• Inland Transport at Destination: Arrange and pay for inland transportation from the port of destination to their final warehouse or destination.

• Risk Transfer Point: Risk of loss or damage to the goods transfers from the seller to the buyer when the goods pass the ship's rail and are loaded on board the vessel at the named port of shipment.

(Suitability/Use Cases): FOB is commonly used for:

• Sea or Inland Waterway Transport: Specifically for these modes of transport only.

• Non-Containerized Goods or Bulk Cargo: Often used for goods that are not shipped in containers, or for bulk commodities.

• Seller Near Port of Origin: Suits sellers located relatively close to the port of shipment.

• Buyer Arranges Main Carriage: When the buyer wants to select and manage the ocean freight carrier.

Key Takeaway for FOB: FOB is a widely used Incoterm for sea shipments. The critical point is risk transfer upon loading at the port of origin. While the seller handles export and port delivery, the buyer takes responsibility for the main carriage, insurance, and destination processes.

CIF (Cost, Insurance and Freight) - (For Sea and Inland Waterway Transport Only)

Cost, Insurance, and Freight (CIF) is another Incoterm specifically for sea and inland waterway transport. Under CIF, the seller takes on significantly more responsibility than under FOB. The seller must not only deliver and load the goods on board at the port of shipment and handle export customs, but also arrange and pay for the main carriage (ocean freight) to the agreed port of destination and obtain minimum marine insurance coverage for the buyer's benefit during transit. However, crucially, risk still transfers to the buyer when the goods are loaded on board at the port of shipment.

Seller Responsibilities:

• Prepare Goods & Packaging: Package the goods for sea transport and export.

• Export Customs Clearance: Handle and pay for export customs procedures in the country of origin.

• Delivery to Port & Loading: Transport the goods to the port of shipment and load them on board the vessel.

• Ocean Freight Payment: Arrange and pay for the ocean freight to the named port of destination.

• Minimum Marine Insurance: Obtain and pay for minimum coverage marine insurance (Clause C or similar) to cover the buyer's risk of loss or damage during sea transit from the port of shipment to the port of destination. The seller must provide the insurance policy or certificate to the buyer.

Buyer Responsibilities:

• Unloading at Destination Port: Arrange and pay for unloading the goods at the port of destination.

• Import Customs Clearance: Handle and pay for import customs procedures, duties, taxes, and charges in the buyer's country.

• Inland Transport at Destination: Arrange and pay for inland transportation from the port of destination to the final warehouse or destination.

• Additional Insurance (Optional): While the seller provides minimum insurance, the buyer may want to arrange for additional or broader insurance coverage if they require more comprehensive protection.

• Risk Transfer Point: Risk of loss or damage to the goods transfers from the seller to the buyer when the goods are loaded on board the vessel at the port of shipment (origin port).

(Suitability/Use Cases): CIF is often used when:

• Sea or Inland Waterway Transport: Exclusively for these modes.

• Buyer Wants Seller to Manage Freight & Insurance: Buyers who prefer the seller to handle arranging and paying for the main carriage and at least basic insurance, simplifying their part of the logistics process and providing a more landed cost estimate.

• Commodity Trading: Frequently used in commodity trading.

Key Takeaway for CIF: CIF offers buyers convenience as the seller manages freight and minimum insurance to the destination port. However, buyers must understand that risk transfers at the origin port (when loaded). CIF requires the seller to obtain minimum insurance; buyers needing more comprehensive coverage may need to arrange supplemental insurance.

CFR (Cost and Freight) - Named Port of Destination (For Sea and Inland Waterway Transport Only - Insurance is Buyer's Responsibility)

Cost and Freight (CFR) is also specific to sea and inland waterway transport and is very similar to CIF, except the seller is not obligated to provide insurance. Under CFR, the seller must arrange and pay for the ocean freight to the named port of destination, as well as handle export customs and loading at the port of shipment. However, the buyer is responsible for obtaining insurance if they desire coverage during the main sea carriage. Risk, as with CIF and FOB, still transfers at the port of shipment.

Seller Responsibilities:

• Prepare Goods & Packaging: Package for sea transport and export.

• Export Customs Clearance: Handle and pay for export procedures.

• Delivery to Port & Loading: Transport to port of shipment and load on board the vessel.

• Ocean Freight Payment: Arrange and pay for ocean freight to the named port of destination.

• No Insurance Obligation: Seller is not required to obtain or pay for insurance.

Buyer Responsibilities:

• Marine Insurance (Buyer's Responsibility): The buyer is responsible for arranging and paying for marine insurance to cover the goods during the main carriage, if desired. It is highly recommended that buyers obtain insurance under CFR.

• Unloading at Destination Port: Arrange and pay for unloading at the destination port.

• Import Customs Clearance: Handle and pay for import customs procedures, duties, taxes, and charges in the buyer's country.

• Inland Transport at Destination: Arrange and pay for inland transportation from the port of destination.

• Risk Transfer Point: Risk of loss or damage to the goods transfers from the seller to the buyer when the goods are loaded on board the vessel at the port of shipment (origin port).

(Suitability/Use Cases): CFR is suitable in situations similar to CIF, specifically for sea/inland waterway transport, and when:

• Buyer Wants Seller to Manage Freight, But Handles Insurance: Buyers may choose CFR when they prefer to manage their own insurance arrangements, perhaps because they have existing global insurance policies or can obtain more favorable rates.

• Commodity Trading: Also common in commodity trades.

Key Takeaway for CFR: CFR is like CIF but without the seller's obligation to provide insurance. Buyers using CFR must be aware that they are responsible for insuring the goods during the main carriage if they want to be protected against loss or damage. Risk transfer, importantly, still occurs at the port of shipment, not destination.

FCA (Free Carrier) - (For Any Mode of Transport)

Free Carrier (FCA) is a versatile Incoterm suitable for any mode of transport – including air, rail, road, and sea (including multimodal transport). FCA signifies that the seller fulfills their delivery obligation when they hand over the goods, cleared for export, to the carrier nominated by the buyer at a named place in the seller's country. This named place can be the seller's own premises, or a terminal, freight forwarder's warehouse, or any other location in the seller's country. Once the goods are delivered to the carrier at that named place, responsibility and risk transfer to the buyer. FCA offers more seller responsibility than EXW, as the seller handles export clearance, but less than FOB, CFR, or CIF as the seller's obligation for main carriage is limited to delivery within their own country.

Seller Responsibilities:

• Prepare Goods & Packaging: Package the goods appropriately for transport and export.

• Export Customs Clearance: Handle and pay for all export customs procedures and documentation in the country of origin.

• Deliver Goods to Named Place: Deliver the goods, cleared for export, to the carrier (or another party nominated by the buyer) at the agreed named place in the seller's country. This named place should be clearly specified in the contract (e.g., "FCA [Named Place - e.g., Seller's Warehouse, City], Thailand"). The seller must deliver to this location.

• Loading (If Delivery at Seller's Premises): If the named place is the seller's own premises, the seller is responsible for loading the goods onto the buyer's carrier. However, if delivery is at any other named place, the seller is not responsible for unloading.

• Provide Proof of Delivery: Provide the buyer with usual proof of delivery that the goods have been delivered to the named place (e.g., transport document, forwarder's receipt).

Buyer Responsibilities:

• Nominate Carrier and Transport: Nominate the carrier (e.g., trucking company, airline, freight forwarder) and arrange/pay for transport from the named place in the seller's country to the final destination.

• Main Carriage & Insurance: Arrange and pay for the main international freight and any insurance desired for the shipment.

• Unloading at Named Place (If applicable): If the delivery point is not the seller's premises, the buyer is responsible for unloading the goods from the seller's transport at the named place.

• Import Customs Clearance: Handle and pay for all import customs procedures, duties, taxes, and charges in the buyer's country.

• Inland Transport at Destination: Arrange and pay for inland transportation from the arrival point in the buyer's country to the final warehouse or destination.

• Risk Transfer Point: Risk of loss or damage to the goods transfers from the seller to the buyer when the seller has delivered the goods, cleared for export, to the buyer's carrier (or nominated party) at the named place in the seller's country.

(Suitability/Use Cases): FCA is a very versatile and frequently used Incoterm suitable for:

• Any Mode of Transport: Air, sea, road, rail, and multimodal shipments.

• Containerized Goods: Common for container shipments (unlike FOB, which is less suitable for containerized goods when risk transfer at origin port is intended).

• Delivery to Various Locations in Seller's Country: Can be used when delivery happens at seller's factory, a terminal, airport, freight forwarder's warehouse, etc., in the seller's country.

• Seller Handles Export Clearance: When the buyer wants the seller to handle export customs procedures, but wants to manage and pay for the main international freight from the seller's country onwards.

Key Takeaway for FCA: FCA is a flexible Incoterm for all transport modes. The seller's key responsibilities are export clearance and delivering goods to the buyer's carrier at a named place in the seller's country. Risk transfers at that named place in the seller's country. FCA is a good "middle-ground" Incoterm in terms of responsibility sharing.

Clarification on "FOB Destination / Freight Prepaid" - and Why It's Often Misleading in International Trade

You may sometimes encounter the term "FOB Destination / Freight Prepaid," especially in less formal contexts. However, it's crucial to understand that "FOB Destination" is not a recognized Incoterm within the official Incoterms rules for sea freight. In standard Incoterms, "FOB" (Free On Board) always implies risk transfer at the port of shipment (origin) – when the goods are loaded onto the vessel.

The phrase "Freight Prepaid" simply indicates who pays for the freight – in this case, the seller. So, "FOB Destination / Freight Prepaid" is usually an informal way of describing a situation where the seller pays for the freight to the destination port, but the term incorrectly suggests that risk also only transfers at the destination port for sea freight.

Why it's Misleading:

• No Official Incoterm: "FOB Destination" is not a defined Incoterm by the ICC for sea freight. Using it creates ambiguity and potential legal issues.

• Incorrect Risk Transfer Implication: It wrongly implies that risk transfers at the destination port for sea shipments under a term starting with "FOB". This is contrary to how standard FOB, CFR, and CIF actually work in Incoterms.

More Accurate Alternatives:

If you encounter "FOB Destination / Freight Prepaid," it is most likely that the intended meaning is closer to:

• CFR (Cost and Freight): If insurance is not included and risk transfers at the port of shipment.

• CIF (Cost, Insurance, and Freight): If minimum insurance is included and risk transfers at the port of shipment.

• "D" Terms (for true destination risk transfer, but not "FOB"): If risk is intended to transfer at the destination port (for sea freight, this is less common, but possible using "D" group Incoterms like DAP, DPU, or DDP, but these are NOT "FOB" terms).

Recommendation:

Avoid using "FOB Destination / Freight Prepaid" in international shipping discussions. Instead, use the correct Incoterms – FOB, CFR, CIF, or "D" terms – and clearly specify the named place and port in your documentation. Always clarify the point of risk transfer to avoid misunderstandings. If someone uses "FOB Destination," politely ask for clarification on what they actually mean in terms of responsibilities and risk transfer.

Key Takeaway for "FOB Destination": Be wary of "FOB Destination / Freight Prepaid" as it is not a standard Incoterm and is often used incorrectly, particularly regarding risk transfer for sea freight. Use standard Incoterms like CFR or CIF and clarify risk transfer points to avoid confusion in international trade agreements.