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Incoterms In Plain English: A Freight Shipping Guide

Freight incoterms are the standard contract term used in sales contracts with importing/exporting to define responsibility and liability for shipment of the goods. In plain English – how far along the process will the supplier ensure that the goods are moved, and at what point does the buyer take over the shipment process.

FOB (Free On Board), EXW (Ex Works) and FCA (Free Carrier) are the most familiar incoterms but there’s much about these and the other options to learn. Because they are legal terms, written from a legal perspective, they can be confusing or easily misunderstood. And making the wrong choice might turn your shipment into an expensive nightmare.

This guide is designed for businesses with less experience dealing with international freight, and provides comprehensive information, clearly explaining each incoterm. But because they are legal terms, there are a few key terms you must first be sure that you understand before you check out an individual incoterm.

Key Terms

Incoterm

Short for “international commercial terms”, incoterms are standardised contract terms to be added to a contract of sale that will involve an international freight shipment. The terms define the buyer and seller’s responsibilities and the risks that they are assuming. They are managed and periodically updated by the International Chamber of Commerce (ICC) since 1936. It is almost impossible to arrange an international freight movement if an incoterm is not included in the contract of sale. Excepting EXW, they are grouped by their first letter into F terms, C terms or D terms.

Responsibility & Risk (Liability)

Responsibility defines which of the two parties – buyer or seller – will arrange and pay for different stages of the shipment. For instance, who will book the pickup truck and pay the local carrier. One of the parties will need to be responsible for each step – from trucking to ocean/air, customs and insurance.

Liability defines which of the two parties – buyer or seller – must resolve issues if something goes wrong at a particular stage. Who, for instance, will call the local trucking company if the truck doesn’t turn up for pickup, or will hound in insurers if the cargo is damaged and the insurers contest the claim.

At some point in the shipment’s movement this legal layer of responsibility and risk will change hands from the seller to the buyer. For incoterms that start with “C”, responsibility and risk change hands at different points.

Named Place | Named Place Of Delivery | Named Place Of Destination

This term comes up when trying to figure out who’s responsible when things go wrong. The sales contract will define at which point the seller completes his contractual obligation, and liability shifts to the buyer. The point is called the Named Place Of Delivery (‘delivery’ here is legal jargon and doesn’t refer to the actual shipment delivery point).

As noted above, liability and responsibility is handed over at different points for incoterms that begin with “C”. For these terms, liability is handed over at the named place of delivery, but the point where responsibility is handed over is defined as the Named Place Of Destination. Again, the word ‘destination’ is legal jargon, and should not be confused with the shipment’s actual destination.

Containerized Freight | FCL | LCL

Most freight shipments uses containers, or the pallets, crates and boxes that fit into containers or airplane holds. There are seven incoterms dedicated to this type of cargo. A full container load (FCL) is where the shipment is to be the only one in a container. Smaller ocean freight shipments, that will be consolidated with other shipments in a container, are called less than a container load (LCL). Ocean containers are never used in air freight (although they would fit into an Anatov 225).

Terminal

A terminal is a facility that can receive the shipment, such as a sea port, airport, or inland freight interchange (e.g. Denver). This clearly includes quays and airport gates, but also nearby container yards and warehouses.

Main Stages In An International Shipment

One way to think of the following stages, is as an international passenger flight. So, Pickup is the taxi ride to the airport, Forwarder Handling is your group tour operator, Terminal Handling is checking in, security and grabbing a coffee, Customs is passport control.

Pickup covers the first stage from when a truck arrives, is loaded, and the shipment is delivered, either to a forwarder’s warehouse or directly to the export terminal.

Forwarder Handling (Export) is an intermediate step between pickup and terminal handling, that happens at a forwarder’s warehouse. LCL ocean freight, and air freight shipments are consolidated (prepped and stuffed). FCLs almost always skip this step.

Terminal Handling (Export) covers all transport, storage and port related activities in the export country after the goods have been consolidated, or delivered by the truck that picked up the goods. The final stage is loading onto the ship or plane.

Customs (Export) covers clearance by Customs (and, for the US only, clearance by other authorities). Depending on the country and product, this step may not be required. This is an office procedure, processing the paperwork filed on behalf of the exporter or importer. In some instances this may also include inspection, storage and applying penalties. These additional steps happen at a bonded warehouse somewhere in the terminal, after arrival and before loading for international transit.

International Transit is the port to port stage between the export country and the import country by ship or plane. More correctly, this is the terminal to terminal stage, because it may cover additional transit by rail or road to an inland freight interchange.

Forwarder Handling (Import), Terminal Handling (Import), Customs (Import), Delivery are the same steps as in the export country, but in reverse order. Instead of Pickup, the final stage is called Delivery, which is usually to the buyer’s warehouse. This is not necessarily an incoterm’s definition of delivery (refer Named Place, above).

Comprehensive Incoterms Guide

What is EXW (Ex Works) Shipping Incoterm?

In Plain English

For EXW (Ex Works) shipping, the buyer arranges the full shipment, from the supplier’s warehouse to the cargo’s ultimate destination.

Where Is The Named Place For Handing Over Responsibility From The Seller To The Buyer?

The buyer is liable and responsible for almost every step. The seller is only responsible for the Bill of Lading or Air Waybill, and ensuring that the goods are available for pickup at the named place, usually their factory, at a time agreed with the forwarder.

What Does The ICC Say?

Recommended for containerized freight.

Is This A Good Choice?

This is probably not a convenient arrangement, as the buyer is usually in a much poorer position than the seller for arranging tasks in the export country. Those tasks include loading the truck; arranging for specialised equipment for loading if required; documentation (the seller is only obliged to help get an export licence, Certificate of Origin etc. – and is not even obliged to provide packing lists or fumigation certificates); and managing export clearance. Consider FCA instead.

Tips And Tricks

  • If the seller is going to help load, make sure to include this elsewhere in the sales contract.
  • This shouldn’t be a problem if importing from China, but when selecting a forwarder, check that they are able to arrange export customs clearance.
  • The buyer isn’t actually obliged to arrange a contract of carriage. This means that the buyer may sell the goods on to a customer, who will then arrange collection.
  • Exporters should hand over a courier receipt or FCR to the buyer’s forwarder, rather than handing over the Air Waybill or Bill of Lading.
  • Exporters won’t have direct evidence of export, should they otherwise be able to claim a rebate from domestic sales tax.

What is FCA (Free Carrier) Shipping Incoterm?

In Plain English

For FCA (Free Carrier) shipping, the seller arranges most or all of the export country stages (e.g. customs, trucking within the export country). The buyer arranges all other stages to the cargo’s ultimate destination.

Where Is The Named Place For Handing Over Responsibility From The Seller To The Buyer?

The seller is liable and responsible for all tasks in their country up until the goods are delivered to the carrier at the named place, usually the terminal or a warehouse (e.g. consolidation centre). Unless the named place is the terminal, the buyer will be liable and responsible for some tasks in the export country.

What Does The ICC Say?

Recommended for containerized freight.

Is This A Good Choice?

FCA overcomes the disadvantages of EXW, where the buyer is in a worse position than the seller for arranging local transport and customs.

Tips And Tricks

  • If the named place is a forwarder’s warehouse or some other terminal that is not the seaport or airport, the seller remains liable and responsible for loading the truck at their premises, with the carrier responsible for unloading the truck at the named place. The buyer is therefore liable and responsible for some tasks in the export country (transportation and terminal charges).
  • The named place can also be the supplier’s factory, making it similar to EXW, excepting the supplier is responsible for loading the truck. The buyer is therefore liable and responsible for some tasks in the export country (transportation and terminal charges).
  • Irrespective of where the named place is, the seller is still responsible for all export and documentation tasks.

What is FAS (Free Alongside Ship) Shipping Incoterm?

In Plain English

For FAS (Free Alongside Ship) shipping, the seller arranges all export country stages. The buyer arranges all other stages to the cargo’s ultimate destination. Not recommended.

Where Is The Named Place For Handing Over Responsibility From The Seller To The Buyer?

The seller is liable and responsible for all the steps in their country, up until the goods are alongside the ship, or the terminal warehouse in the case of air freight. The buyer is responsible for loading.

What Does The ICC Say?

Not recommended for containerized freight. Designed for bulk and break bulk cargo.

Is This A Good Choice?

There is no obvious reason why the buyer should only want to be liable and responsible for one task in the export country – loading containerized freight. Consider FOB instead, which is exactly the same as FAS, but has the additional benefit of the seller being liable and responsible for loading the ship.

What is FOB (Free On Board) Shipping Incoterm?

In Plain English

For FOB (Free On Board) shipping, the seller arranges all export country stages. The buyer arranges all other stages to the cargo’s ultimate destination. Not recommended for air freight or ocean LCL.

Where Is The Named Place For Handing Over Responsibility From The Seller To The Buyer?

The seller is responsible and liable for all the steps in their country, up until the goods are loaded onboard the ship or plane.

What Does The ICC Say?

Recommended for containerized freight. However, …

Is This A Good Choice?

Although the ICC did not intend this incoterm for containerized freight, it is ideal and very popular for full container loads (FCL). However, it should not be used for ocean less than a container load (LCL) or air freight.

Tips And Tricks

  • FOB is not suitable for LCL or air freight, because there is a middle step for load consolidation. The named place of delivery is the consolidation facility, not the ship or plane. Consequently the buyer will be liable and responsible for the remaining transportation and terminal charges. For LCL and air freight, consider FCA instead.

What is CPT (Carriage Paid To) Shipping Incoterm?

In Plain English

CPT (Carriage Paid To) is a tricky incoterm. Read the details carefully. Only recommended if using a Letter of Credit.

Where Is The Named Place For Handing Over Responsibility From The Seller To The Buyer?

The seller is responsible and liable for all the steps in their country, or as far as the buyer’s forwarder’s warehouse. The seller is also responsible for booking main carriage to a terminal in the buyer’s country, or even further to the buyer’s warehouse. Either way, the seller is not liable after the goods arrive at the terminal or warehouse in their own country.

What Does The ICC Say?

Recommended for containerized freight.

Is This A Good Choice?

Importers who don’t have representative at port should be wary using this term, unless they are sure that the carrier’s rates include terminal handling charges. If not, your seller’s forwarder will use a 3rd party agent to manage import clearance, duties and terminal charges. Many importers get caught with inflated charges and dubious fees that they are effectively unable to challenge.

Tips And Tricks

  • By contrast, this incoterm is often an excellent choice for larger importers, if they have an agent responsible for goods (clearing and delivery) once they reach the terminal at the import country.
  • If there is more than one carriage in the export country, e.g. via a forwarder’s warehouse for consolidation, the seller is not liable or responsible for the middle man (second carriage), unless that is made clear in the sales contract.
  • Risk (liability) and responsibility (for tasks and payment) are handed over at different points for C terms. Risk is transferred in the export country when the carrier receives the shipment (at the named place of delivery), even though the buyer has booked and paid for the main carriage.
  • When the incoterm is mentioned in a contract of sale, the named place immediately follows, e.g. EXW (address of seller’s factory). For those incoterms where risk and responsibility are split, use the named place of destination (responsibility). Be sure to specify the named place of delivery (liability) elsewhere in the sales contract.
  • The buyer should arrange insurance cover from where liability is transferred (the named place of delivery), i.e. the terminal in the export country.
  • One of the four C terms should be selected when the sales contract includes a letter of credit.

What is CIP (Carriage And Insurance Paid To) Shipping Incoterm?

In Plain English

CIP (Carriage And Insurance Paid To) is a tricky incoterm. Read the details carefully. Only recommended if using a Letter of Credit.

Where Is The Named Place For Handing Over Responsibility From The Seller To The Buyer?

This incoterms works exactly like CPT, excepting the seller is also responsible for arranging main carriage insurance.

What Does The ICC Say?

Recommended for containerized freight.

Is This A Good Choice?

Refer CPT.

Tips And Tricks

  • Refer CPT, obviously excepting the tip on the buyer arranging insurance.
  • The seller need only arrange minimum insurance cover, to the invoice value of the goods. If the buyer considers that this level of cover is not sufficient, an agreed level of cover can be included elsewhere in the contract of sale.
  • Although the seller is responsible for insurance, the risk transfers to the buyer before the main carriage.
  • The seller is not obliged to arrange insurance for pre-carriage in the export country, or carriage in the import country, unless this is specified elsewhere in the sales contract.

What is CFR (Cost And Freight) Shipping Incoterm?

In Plain English

CFR (Cost And Freight) is a tricky incoterm. Read the details carefully. Not recommended.

Where Is The Named Place For Handing Over Responsibility From The Seller To The Buyer?

The seller is liable and responsible for all the steps in their country up to the point the goods are loaded on board the vessel, and is also responsible – but not liable – for the main carriage.

What Does The ICC Say?

Not recommended for containerized freight. Designed for bulk and break bulk cargo.

Is This A Good Choice?

As for FOB, this incoterm is suitable for FCL, but not for LCL and Air Freight (refer FOB).

Also, importers who don’t have representative at port should be wary using this term, unless they are sure that the carrier’s rates include terminal handling charges. If not, your seller’s forwarder will use a 3rd party agent to manage import clearance, duties and terminal charges. Many importers get caught with inflated charges and dubious fees that they are effectively unable to challenge.

Tips And Tricks

Refer CPT.

What is CIF (Cost, Insurance And Freight) Shipping Incoterm?

In Plain English

CIF (Cost, Insurance And Freight) is a tricky incoterm. Read the details carefully. Not recommended.

Where Is The Named Place For Handing Over Responsibility From The Seller To The Buyer?

This incoterms works exactly like CPT, excepting the seller is also responsible for arranging main carriage insurance.

What Does The ICC Say?

Not recommended for containerized freight. Designed for bulk and break bulk cargo.

Is This A Good Choice?

Refer CFR.

Tips And Tricks

  • Refer CPT, obviously excepting the tip on the buyer arranging insurance.
  • The seller need only arrange minimum insurance cover, to the invoice value of the goods. If the buyer considers that this level of cover is not sufficient, an agreed level of cover can be included elsewhere in the contract of sale.
  • Although the seller is responsible for insurance, the risk transfers to the buyer before the main carriage.
  • The seller is not obliged to arrange insurance for pre-carriage in the export country, or carriage in the import country, unless this is specified elsewhere in the sales contract.

What is DAT (Delivered At Terminal) Shipping Incoterm?

In Plain English

For DAT (Delivered At Terminal) shipping, the seller arranges all export country charges and international transit. The buyer arranges the rest. This incoterm can lead to problems as it involves two forwarders at a critical point.

Where Is The Named Place For Handing Over Responsibility From The Seller To The Buyer?

The seller continues responsibility and risk just into the import country, up until the shipment is unloaded.

What Does The ICC Say?

Recommended for containerized freight.

Is This A Good Choice?

This rule favors the seller where the seller is stronger, being liable and responsible for all tasks in the export country; and favors the buyer where the buyer is stronger, being liable and responsible for all tasks in the import country. The seller is also liable and responsible for the main freight. Also consider DAP with a terminal as the named place, where the buyer pays for unloading.

Tips And Tricks

  • The seller pays for unloading. The buyer is responsible for all charges after unloading, except (in theory) any charges caused by delay, including demurrage charges at the terminal, which is generally the seller’s responsibility.
  • That exception can get contentious. The seller has good grounds to refuse to pay if the buyer held up import customs clearance. But, maybe that was because the seller submitted incorrectly in the first place. Maybe that was the Customs broker’s error. Consider ways to avoid this type of dispute when negotiating the contract, stage, e.g. the seller couriers some documents to the buyer before pickup; liability for demurrage and other costs takes into account the above scenario, all information on documents to be submitted to Customs must be double-checked. Basically, the buyer, seller and carrier need to work closely. Or instead, consider CPT (delivery to buyer’s warehouse).
  • Ensure that the seller can undertake all the necessary formalities in the buyer’s country, e.g. paying GST or VAT.
  • Damages are more likely to occur between the buyer’s premises and the import country terminal, than the final leg to the buyer’s warehouse. However, this can be difficult to proove. Consider DAP instead.
  • If the named place is a clearance depot, or for more porous borders where Customs does pre-clearance at the border, the shipment may be delivered to the named place uncleared, that is payment to Customs still required.

What is DAP (Delivered At Place) Shipping Incoterm?

In Plain English

For DAP (Delivered At Place) shipping, the seller arranges the entire shipment, except import customs.

Where Is The Named Place For Handing Over Responsibility From The Seller To The Buyer?

The seller continues responsibility and risk into the import country, usually to the buyer’s preferred warehouse (their own, FBA warehouse, the forwarder’s warehouse, etc). However, as for FCA, the named place may be also be the terminal.

What Does The ICC Say?

Recommended for containerized freight.

Is This A Good Choice?

This is probably not a convenient arrangement, as the seller is usually in a much poorer position than the buyer for arranging tasks in the import country.

Tips And Tricks

  • All tips and tricks for DAT also apply for DAP, excepting the first – responsible for unloading.
  • For DAT the seller is responsible for unloading. For DAP the buyer is responsible for unloading.
  • If the terminal is selected as the named place, DAP is exactly the same as DAT, excepting the seller pays for unloading.

What is DDP (Delivered Duty Paid) Shipping Incoterm?

In Plain English

For DDP (Delivered Duty Paid) shipping, the seller arranges the entire shipment, including import customs.

Where Is The Named Place For Handing Over Responsibility From The Seller To The Buyer?

The seller is liable and responsible for the entire shipment. The buyer is only responsible for unloading the goods, including import clearance/payments. The named place of delivery is usually the buyer’s choice of warehouse.

What Does The ICC Say?

Recommended for containerized freight.

Is This A Good Choice?

This is probably not a convenient arrangement, as the seller is usually in a much poorer position than the buyer for arranging tasks in the import country. This can lead to several problems (refer tips and tricks). Less experienced importers should probably avoid this incoterm, and consider DAP instead.

Tips And Tricks

  • Some countries, including the US, do not permit forwarders to complete customs clearance. Therefore, the supplier must be registered as an importer, or else they will not be able to complete import clearance.
  • Suppliers should also be experienced acting as an importer. Import clearance is complicated, and if the process is not followed to the letter, the shipment is likely to be held up in Customs.
  • Therefore, the seller should insist on a copy of the entry documentation from the clearance agent to be provided soon after submission, to check for errors. In some countries, Customs accepts timely corrections.
  • Domestics sales tax can only be paid by locally-registered businesses. If the seller isn’t registered, the buyer will probably become liable for sales tax. There is a workaround by qualifying the rule, e.g. Delivered Duty Paid (Sales Tax unpaid).
  • DDP does not specifically require the seller to undertake import clearance. The buyer and seller may agree that the buyer manages this task instead.
  • If the buyer offers to clear the goods for the seller, they should insist on using their own clearance agent. Otherwise they risk losing control of the shipment’s whereabouts. They could end up being responsible for unnecessary costs, especially demurrage and storage. This can be overcome by specifying elsewhere in the sales contract that the buyer is not liable for any additional costs caused by clearance agent error, and is not liable for any costs beyond a short period (2-3 days) after carrier release.
  • A sales quotation from the supplier based on this incoterm is effectively the landed cost, and can be used to decide whether to source domestically or import.

Additional Incoterms Tips

At What Point You Should Consider Incoterms

Buyers should consider incoterms before the contract of sale is negotiated, or risk being stung by the supplier on the deal, and/or having unnecessary complications to the shipment.

Main Differences Specific To A Country

The above advice covers most countries in most circumstances. For instance, customs procedures are much more relaxed at porous borders, like within the EU. The three other exceptions likely to affect shipments are: the US is the only country that requires a Customs Bond; importing into the UK requires a Deferment Account; and exporting from India includes a withholding tax.

When To Challenge Advice

Some forwarders prefer only using a favored set of incoterms because they ‘seem to work’. Therefore don’t be surprised if some forwarders push back on your selection of incoterm, despite it being the most appropriate incoterm for your shipment.

What Incoterms Don’t Cover

Incoterms do not cover property rights, possible force majeure situations and breach of contract. Include of these within the contract of sale. Similarly, all incoterms except the C terms do not assign responsibility for arranging insurance. Cargo insurance is therefore a separate cost for buyers.

Define Named Place In The Sales Contract

When the incoterm is written in the sales contract, the named place should immediately follow the three letter incoterm abbreviation, e.g. “FCA Shenzen Yantian CFS”. Be precise when defining the location, especially with larger cities that may have several terminals, and with larger terminals that may have several drop-off points. You can use this global port finder to find specific port codes.

How Letters Of Credit Limit Choice Of Incoterm

If the sale is being completed with a letter of credit, or documentary credit, the bank requires the seller to provide some key documents to start the chain to release funds. However, the seller does not receive the bill of lading / air waybill from the carrier for EXW or the F terms. Given that letters of credit are used where there is limited trust between the seller and the buyer, so the seller is unlikely to want to incur additional freight costs under the D terms. That only leaves the C terms for use with a letter of credit.

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