The shipping industry depends on local and international trade by moving raw materials and final goods and facilitating the delivery of items to customers. During this process, buyers and sellers exchange goods along with the risks and responsibilities.

An internationally recognised set of norms and regulations has been implemented as standard rules expected to be followed by buyers, sellers, shippers, and carriers.

These standards and rules are known as Incoterms, and this blog will explain what they are, how many there are, and which are the seven commonly used incoterms.

What are Incoterms?

International Commercial Terms or Incoterms were introduced in the year 1936 for freight container transportation by the International Chamber of Commerce (ICC).

Incoterms, to put it simply, are agreements that let buyers and sellers communicate clearly. The Incoterms regulations swiftly help distribute the responsibilities between involved parties, not just in organising but also in terms of finances.

Although shipping container transport is standardised, the Incoterms are entirely voluntary; the parties to a contract must expressly integrate them to have legal force.

Classification of Incoterms

Incoterms are classified into two major categories:

1. Norms for all means of transportation

• FAS (FREE ALONGSIDE SHIP)
• FOB (FREE ONBOARD)
• CFR (COST AND FREIGHT)
• CIF (COST INSURANCE AND FREIGHT)

2. Sea and waterway transportation regulations

• FAS (FREE ALONGSIDE SHIP)
• FOB (FREE ONBOARD)
• CFR (COST AND FREIGHT)
• CIF (COST INSURANCE AND FREIGHT)

Let’s dive deep into the seven commonly used incoterms!

EXW (EX-WORKS)

The EXW Incoterm has the most significant advantages for the seller. A seller’s only obligation is to make the items available. He need not even put the cargo containers onto the chosen conveyance vehicle. Loading and unloading of the products are the buyer’s responsibility. The seller is seen to be in the best position in this situation since he is exempt from clearing the consumers or paying for paperwork.

Since the buyer’s risk is more significant when shipping internationally, EXW is not recommended.

FCA (FREE CARRIER)

FCA, or Free Carrier, is an Incoterm that states that the seller will be liable for transporting the products to the buyer’s preferred carrier. Additionally, passing the export clearance will fall under the purview of the seller. The buyer hands all obligations once the products have been delivered to the initial place of choice.

FAS (FREE ALONGSIDE SHIP)

According to FAS, the seller, is in charge of the required paperwork. It includes invoices and clearance documents and is also needed to package the products. The products will be delivered to the quayside by the shipper, and the buyer will manage the loading. The insurance and safety of the goods are the seller’s sole responsibility even after the goods are boarded onto the ship. The buyer can offer an appropriate insurance policy that gives minimal coverage. Since he is the one who pays for top-ups, the seller is free to negotiate.

FOB (FREE ONBOARD)

In this case, the shipper delivers the items to the ship’s railing. It is a FAS upgrade in which the supplier only promises assistance till the quayside. The expense of shipping, packaging and paperwork are all handled by the shipper. The shipper will load the products, and all liabilities, including damage, now fall on the buyer. The most suitable Incoterm for commodity goods is FOB.

CIF (COST INSURANCE AND FREIGHT)

Due to its fair responsibility distribution, CIF is the most often used Incoterm; let’s look at how. The CIF and CFR are comparable. The seller’s obligation extends to the insurance of the products, as the name implies, ‚Cost, Insurance, and Freight.‘ The seller will cover the cost of the sea transport insurance, but the risk and damage liability will pass to the buyer once the shipment reaches the destination port.

The insurance policy is up to the buyer’s choice, but the seller must cover only the foundational insurance. The responsibilities are frequently transferred following this Incoterm in the nation of the dealers.

CPT (CARRIAGE PAID TO) CPT

Incoterm specifies the powers of a seller, carrier, and buyer.

The vendor will ship the products to the carrier at the chosen location. The seller bears the responsibilities and hazards involved with the shipment of the goods. Buyers will be handling something once the products are delivered to their destination; liability for the goods passes to the carrier once it picks them up.

Insurance paperwork is not required under this Incoterm.

On the other hand, one can plan and carry it out at will.

CIP is an extension of CPT. The only difference is that the seller must assume responsibility for the entire transportation journey’s insurance. The buyers cover the risks and damages after it arrives at the designated destination.

DDP (DELIVERED DUTY PAID)

The seller pays all formalities, export, and import fees in DDP Incoterm. When the seller delivers the items to the customer after paying the duty costs, the buyer assumes the risk of the goods. The seller is in charge of the insurance and is not obligated to pay for it during the voyage.

In contrast to EXW, DDP stipulates that the seller’s obligations cease after the products have been delivered. However, in DDP, the buyer is only liable once all duty costs have been paid & the items have been delivered to the designated place.

Why are Incoterms important?

The Incoterms outline the obligations of the traders in the shipping business, which clarifies the risks and responsibilities. It also specifies where the liability shifts to another party (buyer or seller). The insurance policies, paperwork, and duty fees are part of the journey; the Incoterms help defines these obligations to the seller or buyer.

Container trading companies can adopt these Incoterms and incorporate them into their business modules. Cargo container trading equipped with Incoterms leaves a good impression on the business partner and prevents future conflicts.

The seven commonly used Incoterms are simple and easy to understand. One new to the shipping business might get overwhelmed by this term. However, it is a set of guidelines that helps shipping container companies to run a smooth business.

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