If you ship goods domestically, you may wonder why you need to know Incoterms too. FOB is FOB, isn't it?
Well, actually, no—they’re not!
While the vast majority of companies in the U.S. use the shipping terms identified under the U.S. Uniform Commercial Code (UCC) when shipping domestically, these shipping terms aren't appropriate to use when exporting.
The codes you use for domestic shipping mean something different when shipping internationally (like the term FOB: Shippers often use a variation like FOB Seller or FOB Buyer domestically, which isn’t appropriate internationally because of its very specific meaning.) Not only are the Incoterms different for both scenarios, but they also happen to be acronyms, which can make them even more confusing and difficult to remember.
In this article, we’ll look in-depth at Incoterms—what they are and how they originated, how to apply them, how exporters and importers benefit from them, and why they matter.
What Are Incoterms?
Incoterms 2010 are the official terms published by the International Chamber of Commerce (ICC). They are a voluntary, authoritative, globally-accepted, and adhered-to text for determining the responsibilities of buyers and sellers for the delivery of goods under sales contracts for international trade. Incoterms closely correspond to the U.N. Convention on Contracts for the International Sales of Goods. Incoterms are known and implemented by all major trading nations.
Incoterms are only part of the whole export contract. They don’t say anything about the price to be paid or the method of payment that is used in the transaction. Furthermore, Incoterms don’t deal with the transfer of ownership of the goods, breach of contract, or product liability; all of these issues need to be considered in the contract of sale. Also, Incoterms can’t override any mandatory laws.
The Origin of Incoterms
Differences in trading practices and legal interpretations between traders of different countries necessitated a need for a common set of rules. These rules needed to be easy to understand by all of the participants in order to prevent misunderstandings, disputes and litigation.
Incoterms were first created in 1936 and were designated Incoterms 1936. Since then, Incoterms have evolved into a codified worldwide contractual standard. They are periodically updated as events in international trade occur and require attention. Amendments and additions were made in 1953, 1967, 1976, 1980, 2000, and 2010.
The most current revision of the terms, Incoterms 2010, came into effect on January 1, 2011, and consists of 11 Incoterms. The latest revision categorizes the terms by modes of transport, and according to the export.gov website, reflect “a need for improved cargo security, changes to the Uniform Commercial Code in 2004 that resulted in a deletion of U.S. shipment and delivery terms, and new trends in global transportation.”
You'll find an excellent and detailed discussion of Incoterms 2010 and how to use them in a blog post by Dr. Roberto Bergami, Incoterms 2010 Rules: Revisiting the Correct Usage of the Terms.
While you can still use previous versions of Incoterms, like Incoterms 2000, it’s not preferred; if you’re not using Incoterms 2010, you must clearly state which version you’re using and make sure your documentation is correct throughout the transaction. If you’re looking to streamline the export documentation process, Shipping Solutions export documentation and compliance software can help.
Incoterm 2010 Definitions
Because each of the different Incoterms identify the responsibilities of the seller and the buyer in the transaction at different points in the shipping journey, certain Incoterms work better for certain modes of transportation.
Each of the 11 Incoterms is summarized below based on the mode of transport. Click on the Incoterm name to view a more detailed explanation of that term.
Incoterms for Any Mode of Transport
The seller fulfills his obligations by having the goods available for the buyer to pick up at his premises or another named place (i.e. factory, warehouse, etc.). Buyer bears all risk and costs starting when he picks up the products at the seller’s location until the products are delivered to his location. Seller has no obligation to load the goods or clear them for export.
The seller delivers the goods export cleared to the carrier stipulated by the buyer or another party authorized to pick up goods at the seller’s premises or another named place. FCA Incoterms means the buyer assumes all risks and costs associated with delivery of goods to final destination including transportation after delivery to carrier and any customs fees to import the product into a foreign country.
Seller clears the goods for export and delivers them to the carrier or another person stipulated by the seller at a named place of shipment. Seller is responsible for the transportation costs associated with delivering goods to the named place of destination but is not responsible for procuring insurance.
Seller clears the goods for export and delivers them to the carrier or another person stipulated by the seller at a named place of shipment. Seller is responsible for the transportation costs associated with delivering goods and procuring minimum insurance coverage to the named place of destination.
Seller clears the goods for export and bears all risks and costs associated with delivering the goods and unloading them at the terminal at the named port or place of destination. Buyer is responsible for all costs and risks from this point forward including clearing the goods for import at the named country of destination.
Seller clears the goods for export and bears all risks and costs associated with delivering the goods to the named place of destination not unloaded. DAP Incoterms means the buyer is responsible for all costs and risks associated with unloading the goods and clearing customs to import the goods into the named country of destination.
DDP Incoterms means the seller bears all risks and costs associated with delivering the goods to the named place of destination ready for unloading and cleared for import.
Incoterms for Sea and Inland Waterway Transport
Seller clears the goods for export and delivers them when they are placed alongside the vessel at the named port of shipment. Buyer assumes all risks/costs for goods from this point forward.
Seller clears the goods for export and delivers them when they are on board the vessel at the named port of shipment. Buyer assumes all risks/cost for goods from this moment forward.
Seller clears the goods for export and delivers them when they are on board the vessel at the port of shipment. Seller bears the cost of freight to the named port of destination. Buyer assumes all risks for goods from the time goods have been delivered on board the vessel at the port of shipment.
Seller clears the goods for export and delivers them when they are on board the vessel at the port of shipment. Seller bears the cost of freight and insurance to the named port of destination. Seller’s insurance requirement is only for minimum cover.
Buyer is responsible for all costs associated with unloading the goods at the named port of destination and clearing goods for import. Risk passes from seller to buyer once the goods are on board the vessel at the port of shipment.
The Importance of Incoterms
As you can see, each Incoterm provides exporters and importers clear, succinct rules that help them understand their responsibilities, clarify any gray areas in contracts, and can save a lot of headaches when used correctly. Incoterms reduce the risk of legal complications by giving buyers and sellers a single home base from which to reference trade practices.
Incoterms help establish and execute an international transaction by defining distinct obligations and responsibilities between buyers and sellers. When a seller and a buyer agree to employ a particular Incoterm, each accepts the corresponding obligations and responsibilities as clearly set forth and defined under that particular Incoterm.
By correctly using Incoterms, you’ll be able to partner more harmoniously, transport and deliver your goods more easily, and get paid more quickly. And who doesn’t want that?
Here is an additional resources to consult regarding Incoterms 2010: Incoterms 2010 Freight and Associated Charges.
Incoterms 2020—Changes Are Coming
In 2020, a whole new set of Incoterms will be released. According to the ICC, the Incoterms 2020 drafting process takes two years due to the wide range of input collected from Incoterms users worldwide.
You can be among the first to know when any changes are announced. Sign up for the International Trade Blog email newsletter, so you’re notified anytime we post new information related to changes in Incoterms and anything else important to exporters. (Simply fill out the blue box in the right-hand column to sign up now.)
This article was first published in two parts in October and November 2014 and has been updated to include current information, links and formatting.