Freight solutions

Your essential incoterms guide

Before you enter into an international buying or selling agreement, you have the right to negotiate specific terms (e.g. the price, quantity, and characteristics of the goods) related to the sale. In each international contract, you should also include an international commercial term, or “incoterm” for short.

Incoterms are a series of internationally recognised sales-related trade terms. These terms, summarized in our incoterms guide, clearly define the costs, risks, and obligations of both parties (the buyer and the seller) in an international sales contract. Each term clearly defines:

  • Which party must take responsibility for transport costs for the goods (taxes, insurance, and duties included);
  • Where the goods must be collected for transport to their final destination, and where they should be taken delivery of (i.e. who is responsible for loading and unloading goods);
  • Which party must take responsibility for the goods during each phase of transportation (i.e. who bears the risk of loss).

Applying incoterms to sale and purchase contracts makes global trade easier and helps partners in different countries understand one another.

If you are considering buying goods from an international seller, or selling goods to the international marketplace, it is best to familiarise yourself with the most up to date incoterms. This will make sure that you are well equipped to negotiate the best available term for your sales contract.

NOTE: The ‘seller’ refers to the manufacturer or exporter of the goods, and the ‘buyer’ refers to the importer of the goods.

Do you have to use incoterms?

Incoterms are not mandatory and therefore not implied by default in an international sales contract. If a contractor wants to use them, the contractor must specifically include them in the contract.

Incoterms are revised periodically. The latest version is called Incoterms® 2020. All contracts made under Incoterms® 2010 (the previous version) remain valid. Although it is recommended to use Incoterms® 2020 (as it is the most up to date version), parties can agree to choose any version of the Incoterms rules. It is important, however, to clearly specify which version is used in the contract.

A summary of the main difference between the 2010 and 2020 incoterms is given here.

Figure 1 below summarises Incoterms® 2020 (click on the image to download a larger, printable version).

Incoterms 2020-Table-download

Your incoterms guide:

Incoterms® 2020

Below are some of the key points to consider regarding the seller and buyer duties as outlined in the official 2020 incoterms (developed by the International Chamber of Commerce – ICC).

Ex works (EXW)

  • Works with any mode of transport.
  • Applicable where there is more than one mode of transport.

SELLER

Has to make sure that the goods are:

  • Available;
  • Suitably packaged; and
  • At the specified place (this is usually the seller’s factory/storage area).

BUYER

Is responsible for:

  • Collecting the goods from the seller and carriage.
  • Loading the goods onto the collecting vehicle.
  • Export clearance.

LOOK OUT FOR:

  • The seller does not have to load the goods, but if he does so, it is at the buyer’s risk and request.
  • The buyer is responsible for export clearance in a foreign Customs area.

Free Carrier (FCA)

  • Works with any mode of transport.
  • Applicable where there is more than one mode of transport.

SELLER

  • Loads the goods at their own premise onto a vehicle supplied by the buyer;
  • OR delivers the goods to a carrier selected by the buyer, still on the vehicle of delivery.
  • Clears the goods for export.

BUYER

  • After goods have been delivered to the carrier, the buyer bears the costs and risks of moving the goods to the final destination.

NOTE:

  • FCA is the rule of choice for containerised goods where the buyer arranges for the main carriage.
  • FCA is the only Incoterms rule where delivery can happen in two different ways, so be specific about the point of delivery in the sales agreement.

Free alongside ship (FAS)

  • Only works with goods transported by sea or inland waterway.

SELLER

  • The seller delivers the goods (once cleared for export) to the port of origin alongside the vessel.

BUYER

  • After seller delivers alongside the vessel, the buyer bears all costs and risks of loss or damage.
  • The buyer is responsible for loading the goods.

NOTE:

  • After seller delivers alongside the vessel, the buyer bears all costs and risks of loss or damage.
  • The buyer is responsible for loading the goods.

Free on board (FOB)

  • Only works with goods transported by sea or inland waterway.

SELLER

  • Delivers the goods on board the ship and clears the goods for export.

BUYER

  • After the seller delivers the goods on board the ship and clears the goods for export, the buyer bears all costs and risks of loss or damage.

NOTE:

  • FOB does not work with delivery to a container depot as the goods cannot be placed on a vessel (ship). For containerised goods, consider FCA instead.

Cost and freight (CFR)

  • Only works with goods transported by sea or inland waterway.

SELLER

  • Clears the goods for export and pays the costs of moving the goods to final destination. The risk transfers as soon as the goods are handed over to a carrier.

BUYER

  • After the seller delivers the goods on board the ship and clears the goods for export, the buyer bears the risk of loss or damage.

NOTE:

  • The seller is not responsible for insurance of the goods on the main carriage.
  • For containerised goods, consider CPT instead.

Cost insurance and freight (CIF)

  • Only works with goods transported by sea or inland waterway.

SELLER

  • Clears the goods for export and pays the costs of moving the goods to final destination; and
  • Purchases the cargo insurance in accordance to Clause C as stipulated by the Institute Cargo Clauses. However, the buyer must be the insured party.

BUYER

  • Bears all risk of loss or damage once the goods have been loaded on board the ship.

NOTE:

  • Although the seller is responsible for the cargo insurance, the rule only requires a minimal level of cover, which might not provide sufficient cover depending on the shipment.
  • For containerised goods, consider CIP instead.

Carriage paid to (CPT)

  • Applicable to any mode of transport.
  • Applicable where there is more than one mode of transport.

SELLER

  • Is responsible for arranging the carriage to the named place.
  • Is NOT responsible for insuring goods to the named place.

BUYER

  • From the time the goods are transferred to the first carrier, the buyer bears the risk of loss or damage.

LOOK OUT FOR:

  • Terminal handling charges (THC) are charges collected by terminal authorities at each port against handling equipment and maintenance. The buyer  should find out whether these charges have been added to the carrier’s freight rates, so as to avoid any unforeseen costs.
  • Where there are multiple contracts of carriage (if one carrier hands over to another along the journey), the sales agreement must specify at which point risk transfers to the buyer – when the goods are handed over to the first or second carrier.

Carriage and insurance paid to (CIP)

  • Applicable to any mode of transport.
  • Applicable where there is more than one mode of transport.

SELLER

Responsible for:

  • Arranging carriage to the named place; and
  • Insuring the goods according to Clause A as stipulated by the Institute Cargo Clauses. However, the buyer must be the insured party.

BUYER

  • Bears the risk of loss or damage from the time the goods are transferred to the first carrier.

LOOK OUT FOR:

  • Terminal handling charges (THC) are charges collected by terminal authorities at each port against handling equipment and maintenance. The buyer should find out whether these charges have been added to the carrier’s freight rates, so as to avoid any unforeseen costs.
  • With 2010 incoterms, the seller is only required to provide a minimal level of cover, which might not be sufficient. 2020 incoterms specifies a higher bracket of insurance cover. Be clear about which version of CIP is applicable.

Delivered at place unloaded (DPU)

  • Applicable to any mode of transport.
  • Applicable where there is more than one mode of transport.

SELLER

  • Delivers when the goods, once unloaded from the arriving means of transport, are placed at the buyer’s disposal either at a named terminal, at a named port or at a named place of destination.
  • Bears all risk involved in bringing the goods to, and unloading them at, the named terminal, port or place of destination.

BUYER

  • Bears risk only after the goods have been unloaded.
  • Is responsible for import clearance, and any applicable local taxes or import duties.

LOOK OUT FOR:

  • Many of the ports are very large, therefore it is important to clearly specify the place for delivery.
  • Parties should clarify who would bear the costs of terminal handling charges (THC) if they apply.
  • If the named place of delivery falls after import clearance, the seller carries the risk and cost of a Customs delay until the buyer has cleared the goods for import.

Delivered at place (DAP)

  • Applicable to any mode of transport.
  • Applicable where there is more than one mode of transport.

SELLER

  • Arranges carriage and delivery of the goods (that are ready for unloading form the arriving vehicle) at the named place.
  • Bears all risks involved in delivering the goods to the named place.

BUYER

  • Bears risk once the goods are available for unloading.
  • Is responsible for import clearance, and any applicable local taxes or import duties.

NOTE:

  • This rule can be used in place of the Incoterms 2000 rules DAF, DES, and DDU.

Delivered duty paid (DDP)

  • Applicable to any mode of transport.
  • Applicable where there is more than one mode of transport.

SELLER

  • Delivers the goods cleared for import to the buyer at the destination.
  • Bears all costs and risk of moving the goods to the final destination, including the payment of customs duties and taxes.

BUYER

  • Bears risk once the goods are available for unloading.

NOTE:

  • DDP required the seller to clear the goods for import in a foreign Customs area.
  • It is the only Incoterms rule that requires the seller to take responsibility for import clearance and payment of taxes and/or import duty.
  • The South African VAT Act does not support DDP as it requires a foreign entity to pay import VAT to SARS.
Sign up for online training in Incoterms 2020 to get a better understanding of these rules and how to apply them in international trade.