The History of INCOTERMS

1812: The FOB Incoterm was first used in the British Courts in 1812. This was later known as the forefather of the famous transport clauses - Incoterms.

1895: 83 years later, thanks to the expansion of world trade, a second Incoterm was born.

1936: The birth of Incoterms as we know them today. In 1936, the ICC published the first edition with six Incoterms and rules on how to interpret them. For the first time in history, there was a global effort to standardize international trade practices.

1953: The first Incoterms revision came after WWII. Rail transportation was on the rise and three new Incoterms were introduced for non-maritime transport:Free on Rail, Free on Truck, and Delivered Costs Paid. EXW Incoterm was also added.

1976: The FOB Airport Incoterm (Free on Board Airport) was introduced for air freight to avoid confusion with the FOB Incoterm.

1980: Due to the proliferation of freight traffic in containers, two new Incoterms were added: FRC and FCI, which are known today as FCA and CIP respectively.

1990: A complete revamp of Incoterms to adapt to inter-modal transportation. Changes were made to accommodate the increasing use of Electronic Data Interchange (EDI).

2000: In 2000, Incoterm formats were simplified for clarity and to better distribute responsibilities for customs clearance.

2010: Four Incoterms (DAF, DES, DEQ, DDU) were eliminated and two new ones (DAT and DAP) introduced, bringing the number of Incoterms to 11. Modifications were also made so that buyer and seller were obliged to cooperate in the exchange of information as a security measure.

2020: Definitive changes yet to be announced. But we can expect to see the introduction of a new Incoterm, Cost and Insurance (CNI), and the removal of EXW and FAS. Also expect a more simplified version to aid comprehension and application of each Incoterm.

INCOTERMS 2020 RULES

The Structure of INCOTERMS

Incoterms are governed by the International Chamber of Commerce (ICC) in Paris and are grouped into four different categories. In Groups E and F the seller's obligations are minimal and the buyer must do most of the work and assume maximum risk. As we move to Group C the supplier's obligations become more extensive, however the buyer still assumes risks. As we move to group D the supplier makes most arrangements and assumes maximum risk, whereas the buyer must pay for and arrange import customs clearance and un-loading from the forwarder's vehicle at the final destination.

EXW ( Ex Works )

The seller makes the goods available to be collected at their premises and the buyer is responsible for all other risks, transportation costs, taxes and duties from that point onwards. This term is commonly used when quoting a price.

Example Goods are being picked up by the buyer from the seller's premises in Mundra. The term used in the contract is 'EXW Mundra'.

  • The seller makes the goods available at their premises, or at another named place.
  • Buyer arranges the collection of the freight (goods) from the designated location.
  • Buyer is responsible for clearing the goods through Customs.

FCA ( Free Carrier )

The seller gives the goods, cleared for export, to the buyer's carrier at a specified place. The buyer is then responsible for getting transported to the specified place of final delivery.

This term is commonly used for containers travelling by more than one mode of transport.

  • The seller delivers the goods, cleared for export, at a named place.
  • The goods can be delivered to a carrier nominated by the buyer, or to another party nominated by the buyer.

FAS ( Free Alongside Ship )

The seller puts the goods alongside the ship at the specified port they're going to be shipped from. The seller must get the goods ready for export, but the buyer is responsible for the cost and risk involved in loading them.

This term is commonly used for heavy-lift or bulk cargo (e.g. generators, boats), but not for goods transported in containers by more than one mode of transport (FCA is usually used for this).

  • The seller delivers when the goods are placed alongside the buyer's vessel at the named port of shipment.

FOB ( Free on Board )

The seller must get the goods ready for export and load them onto the specified ship. The buyer and seller share the costs and risks when the goods are on board.

This term is not used for goods transported in containers by more than one mode of transport.

  • Under FOB terms the seller bears all costs including export clearance and risks up to the point the goods are loaded on board the vessel.

CFR ( Cost and Freight )

The seller must pay the costs of bringing the goods to the specified port. The buyer is responsible for risks when the goods are loaded onto the ship.

  • The seller pays for the carriage of the goods up to the named port of destination.
  • Risk transfers to buyer when the goods have been loaded on board the ship in the country of Export.
  • The Shipper is responsible for origin costs including export clearance and freight costs for carriage to named port.

CIF ( Cost, Insurance and Freight )

The seller must pay the costs of bringing the goods to the specified port. They also pay for insurance. The buyer is responsible for risks when the goods are loaded onto the ship.

  • This term is broadly similar to the above CFR term, with the exception that the seller is required to obtain insurance for the goods while in transit to the named port of destination.
  • CIF requires the seller to insure the goods for 110% of their value under at least the minimum cover of the Institute Cargo Clauses

CPT ( Carriage Paid To )

The seller pays to transport the goods to the specified destination. Responsibility for the goods transfers to the buyer when the seller passes them to the first carrier.

  • CPT replaces the C&F (cost and freight) and CFR terms for all shipping modes outside of non-containerized sea freight.
  • The risk transfers to buyer upon handing goods over to that carrier at the place of shipment in the country of Export.

CIP ( Carriage and Insurance Paid )

The seller pays for insurance as well as transport to the specified destination. Responsibility for the goods transfers to the buyer when the seller passes them to the first carrier.

This term is commonly used for containers travelling by more than one mode of transport. If transporting only by sea, CIF is often used.

  • This term is broadly similar to the above CPT term, with the exception that the seller is required to obtain insurance the goods for 110% while in transit.

DAP ( Delivered at Place )

The seller pays for transport to the specified destination, but the buyer pays the cost of importing the goods. The seller takes responsibility for the goods until they're ready to be unloaded by the buyer.

Under DAP terms, the risk passes from seller to buyer from the point of destination mentioned in the contract of delivery, all carriage expenses with any terminal expenses are paid by seller up to the agreed destination point. The necessary unloading cost at final destination has to be borne by buyer under DAP terms.  

After arrival of the goods in the country of destination, the customs clearance in the importing country needs to be completed by the buyer, e.g. import permit, documents required by customs and etc., including all customs duties and taxes.

DPU ( Delivered at Place Unloaded )

DPU is the only INCOTERM rule that requires the seller to unload goods at the place of destination,in order to complete delivery. The seller is responsible for arranging carriage and for delivering the goods, unloaded from the arriving means of transport, at the named place.

There are no restrictions on the named place – for example it can be a transport hub, a warehouse or the buyer’s depot.

Risk transfers from seller to buyer when the goods have been unloaded. The buyer is responsible for import clearance and any applicable local taxes or import duties.

DPU can apply to any—and more than one—mode of transport. The buyer and seller should specify and agree upon a named place of destination.

DDP ( Delivered Duty Paid )

The seller is responsible for delivering the goods to the named destination in the buyer's country, including all costs involved.

Seller is responsible for delivering the goods to the named place in the country of the buyer, but not responsible for unloading.

Seller pays all costs in bringing the goods to the destination including import duties and taxes. Unless the rules and regulations in the buyer's country are very well understood, DDP terms can be a very big risk both in terms of delays and in unforeseen extra costs, and should be used with caution.