INCOTERMS: What they mean

You may have wondered why everyone should know Incoterms. The answer is simple: these trade clauses simplify international trade. Incoterms have never been completely understandable to you in detail? Incoterms are simply explained here. The Incoterms Agreement is absolutely common in international trade and any foreign trade company should be aware of the importance of Incoterms. In this article, we address typical Incoterms questions and pitfalls and explain why Incoterms are needed. If you need advice on Incoterms from our lawyers, please do not hesitate to contact us. We advise companies with regard to the agreement and liability for Incoterms.

Why Incoterms are needed

Who actually needs INCOTERMS? The word “Incoterms” will already be familiar to many internationally operating companies. Incoterms are issued by the International Chamber of Commerce (ICC). These are a large number of voluntary clauses which serve to interpret standard contractual terms in international trade in goods. The clauses make international trade much easier and clearer. However, since these voluntary clauses have become so important in the meantime, every company should know exactly what is behind the individual Incoterms, because the importance of the Incoterms in foreign trade should not be underestimated.

Summary: Who needs Incoterms

  • any company that imports or exports goods,
  • anyone who appreciates reliable regulations in the sales contract and wants to avoid disputes,
  • Freight forwarders and customs agents who have to carry out customs clearance and determine the customs value

Definition of Incoterms

Incoterms are in principle nothing more than a code. A code that always consists of three different letters, behind which there is a certain rule. These rules deal with the rights and obligations of buyers and sellers in international trade. In terms of content, they regulate in particular the duties, obligations and risks of the parties. This concerns the transport, the place of the contractual delivery, the time of the transfer of risk, the bearing of costs and insurance.

Through the Incoterms, contractual partners achieve an internationally uniform interpretation of certain obligations of buyers and sellers. In this way, misunderstandings can be avoided and legal disputes avoided. This is also the reason why the use of Incoterms has met with a high level of international approval – they meet the requirements of the economy throughout the world.

What the Incoterms do not contain are special regulations and detailed statements on questions of payment processing, transfer of ownership or the consequences of breaches of contract.

Please note that the Incoterms only apply to the delivery of movable goods. They cannot be applied to contracts for the supply of non-physical goods, such as computer software.

The first Incoterms were published in 1936 and revised for the seventh time in 2010. The current version is the Incoterms2010. The changes are necessary in order to adapt the Incoterms to current developments in commercial and transport practice.

  • Who regulates the Incoterms?

    The Incoterms are created by the International Chamber of Commerce (ICC). This is a private sector institution and Incoterms is therefore not a law. Rather, companies voluntarily submit to the regulations. The Incoterms have been regulated by the ICC since 1936.

  • What exactly does Incoterms? mean

    The term “Incoterms” is English. It stands for International Commercial Terms (In|co|terms). In German this means “Internationale Handelsklauseln”. This refers to all conditions customary in international trade which govern the delivery, carriage and transfer of risk of consignments.

  • When do Incoterms?

    Incoterms do not apply automatically. They can only apply if they are expressly taken as a basis by the contracting parties when concluding the contract. The Incoterms then only have an effect between the buyer and the seller and bind third parties not involved in the execution of the contract. Incoterms are required to enable the user parties of a contract to carry out their national and international commercial transactions in a standardised manner. The Incoterms lay down the obligations of the contracting parties in detail and thus prevent later legal disputes.

  • What corresponds to Incoterms free domicile?

    Delivery “free domicile” is a commercial clause between merchants. In the case of delivery free domicile, the supplier shall bear all transport costs to the recipient’s front door. Thus, the clause “CPT” is most comparable with the delivery “free domicile”. Here, the buyer and seller agree that the freight is paid to a specific place to be named. According to the party agreement, this can then also be the buyer’s front door.

  • Who pays for the packaging of Incoterms?

    Who has to pay for the packaging of the goods is already regulated by the Incoterms themselves. All clauses are structured according to the same model, so that regulations on packaging obligations for all Incoterms can be found under “A9”. With the clauses FCA, FOB and DAP the seller has to bear the packaging costs, in all other cases the buyer.

  • Who pays the customs duty at Incoterms?

    The question of who has to pay the customs duty is also completely regulated by the Incoterms. In principle, the buyer bears the customs costs for all clauses. Exceptionally, the seller will pay the customs costs if the parties have agreed the clause “DDP”.

  • Who is liable according to the provisions of Incoterms?

    Whether the buyer or the seller is liable for the loss or damage of the goods depends on which clause the two have agreed. In principle, this risk is borne by the seller until the goods are handed over to the first carrier. If, however, the clause “EXW” is agreed, the buyer is liable in exceptional cases before the goods are handed over to the carrier. This means that the buyer would have to pay the purchase price according to this agreement even though he would no longer receive the goods from the seller.

  • Where are the Incoterms regulated?

    The Incoterms are not a law, but a separate set of rules of the International Chamber of Commerce. They are published by it and regularly adapted to commercial customs. The text versions of the Incoterms can be obtained directly from the International Chamber of Commerce

The legal nature of Incoterms

Since the Incoterms are recommendations for clauses issued by the International Chamber of Commerce, the question arises as to the legal nature of the Incoterms. In any case, they are non-binding and will only be included in a contract after corresponding and express agreement – they are therefore recommended terms and conditions that apply solely by virtue of agreement.

Incoterms are not yet general trade customs, even if the Incoterms themselves are partly derived from traditional trade customs or have helped to shape them.

For the rest, mandatory law takes precedence over the Incoterms.

Incoterms valid and accepted throughout the world

The ICC rules apply to international trade throughout the world and are supported by the United Nations Commission on International Trade Law (UNCITRAL).

The Incoterms only become effective when the buyer and seller make concrete reference to them within the framework of their contract. The contracting parties must then agree which Incoterm shall specifically apply to their business and, above all, on which version of the Incoterms they have agreed, as there are several language versions of the Incoterms.

The application instructions of the Incoterms do not themselves become part of the contract. The ICC expressly points out that the instructions for use are only intended to help the user to quickly find the most suitable clause for him and his business. However, the exact examination of the clause does not replace the application instructions.

If you would like to include the Incoterms in one of your contracts, it is also advisable to have a look at the English wording of the original clauses of the ICC.

What do the Incoterms contain?

The current Incoterms 2010 consist of a total of 11 Incoterms, which can be roughly divided into two different categories. The first category contains clauses that can be used regardless of the selected shipment type and regardless of whether more than one shipment type is selected. The second category contains “maritime and inland waterway clauses”.

The following table is intended to give you an initial overview of the application areas of the Incoterms that apply to all types of transport:

  • EXW: ex works (Ex Works)
  • FCA: Free carrier (Free carrier)
  • FAS: Free alongside ship (Free ship)
  • FOB: Free on board (Free on Board)
  • CFR: Cost and Freight
  • CIF: Cost Instance Freight, Insurance and Freight
  • CPT: Costs paid until (Carriage paid to)
  • CIP: Costs and insurance paid to (Cost, Insurance paid to)
  • DAT: delivered to terminal (Delivered at Terminal)
  • DAP: Delivered on site (Delivered at Place)
  • DDP: Delivered and Duty Paid (Delivered, duty paid)
 

Delivery term

 

Significance

EXW Ex Works = ex works– the seller delivers when he makes the goods available to the buyer at the seller’s premises or at another location (e.g. factory, factory, warehouse)

– the seller does not have to load the goods onto a collecting means of transport, nor does he have to clear them for export

FCA = Free Carrier = free carrier– the seller delivers the goods to the carrier or to another person designated by the buyer at the seller’s premises or at another designated place

– The risk then passes to the buyer at this point

– if necessary, the seller is obliged to clear the goods for export – there is no obligation on the seller to clear the goods for import, to pay import duties or to complete import formalities

CPT Carriage paid to = freight paid until– the seller must deliver the goods to the carrier or to another person designated by the seller at an agreed place, conclude the contract of carriage and pay the freight charges incurred for the carriage of the goods to the said place of destination
CIP Carriage and Insurance paid to = freight and insurance paid until– the seller must deliver the goods to the carrier or another person designated by the seller at an agreed place and conclude the contract of carriage

– the seller must also pay the freight costs incurred for the carriage of the goods to the named place of destination

– the seller concludes an insurance contract against the risk of loss of or damage to the goods during transport borne by the buyer – the buyer should note, however, that the seller is only obliged to conclude an insurance with a minimum cover

DAT Delivered At Terminal = delivered Terminal– the seller delivers the goods as soon as they have been unloaded from the arriving means of transport and made available to the buyer at a designated terminal in the designated port or place of destination

– “Terminal” can be any place, whether covered or not, e.g. a quay, a warehouse, a container depot, or a street. Rail or air freight terminal

– the seller bears all risks associated with the transport of the goods to and from the terminal

DAP Delivered At Place = Delivered Named Place– the seller delivers when the goods are made available to the buyer on the arriving means of transport ready for unloading at the named place of destination

– the seller bears all risks arising in connection with the transport to the designated place

DDP Delivered, Duty paid = delivered duty paid– the seller delivers when he places the goods cleared for import at the disposal of the buyer on the arriving means of transport, ready for unloading at the named place of destination

– the seller bears all costs and risks associated with the transport of the goods to the place of destination and has the obligation to clear the goods not only for export but also for import, to pay all duties, both for export and for import, and to complete all customs formalities

-DDP represents the maximum obligation for the seller

 

 

Incoterms for ship transport

Below you will find the most important information about Incoterms, which are used exclusively in the field of shipping:

Terms of delivery Significance
FAS Free alongside Ship = free alongside ship– the seller delivers when the goods have been delivered alongside the vessel designated by the buyer at the named port of shipment

– the risk of loss of or damage to the goods is transferred when the goods are alongside the vessel – the buyer bears all costs from that moment on

FOB Free on Board = free on board– the seller delivers the goods on board the vessel designated by the buyer at the named port of shipment

– the risk of loss of or damage to the goods is transferred when the goods are on board the vessel – the buyer bears all costs from that moment on

– the seller is obliged either to deliver the goods on board the ship or to procure the goods already delivered for shipment – the reference “to procure” here refers to several sales in a sales chain (“string sales”), which occur in particular in the raw material trade

CFR Cost and Freight = costs and freight– the seller must deliver the goods on board the ship or procure the goods already delivered in this way

– the risk of loss of or damage to the goods is transferred when the goods are on board the ship

– the seller must conclude the contract of carriage and bear the costs and freight necessary for the carriage of the goods to the named port of destination

– the seller fulfils his delivery obligation when he hands over the goods to the carrier in the manner chosen and not when the goods reach their destination – since the port of destination and the port of shipment do not always coincide, when using this clause the port of shipment should be designated as precisely as possible by the buyer

CIF Cost, Insurance and Freight = Costs, Insurance and Freight– means that the seller delivers the goods on board the ship or procures the goods already delivered in this way

– the risk of loss of or damage to the goods is transferred when the goods are on board the ship

– the seller must conclude the contract of carriage and bear the costs and freight necessary for the carriage of the goods to the named port of destination

– the seller also concludes an insurance contract against the risk of loss of or damage to the goods during transport borne by the buyer

– the buyer has to consider that the seller is only obliged to take out an insurance with a minimum coverage according to the clause – if the buyer wishes to have additional insurance cover, this requires a separate agreement

 

Lawyer Dr. Tristan Wegner

Your consultant

ABC-Straße 21
20354 Hamburg
T +49 (0) 40 / 36 96 15 0
F +49 (0) 40 / 36 96 15 15
E ow@owlaw.com