If you are new to shipping terms contracts, you may be unaware of the different trading practices in different countries. A small misunderstanding could lead to disputes over who was meant to pay for the overseas freight, insurance, or other costs involved in the shipment of goods. Therefore, it is necessary to have a clear understanding of shipping terms while shipping internationally.
The Incoterms is a set of standardized international trade terms that are published by the International Chamber of Commerce. They are widely used in the international shipping process. The Incoterms rules are made primarily to have clear communication about the tasks, costs, and risks associated with the freight shipping.
Ex Works (EXW)
Ex Works is an international trade term in which a seller makes a product available at a designated location, but the buyer has to cover the transportation costs. Once buyers receive their goods, they are responsible for other risks, such as loading the goods onto trucks, transferring them to a ship or plane, and clearing the goods for export.
Free Carrier (FCA)
This term means that the seller exports the cleared goods to the carrier at the named and defined location mentioned in the shipping contract. So the obligation to deliver goods fulfills by the seller up to the location where FCA contracts. The destination is typically an airport, shipping terminal, warehouse, or other location where the carrier operates. It might even be the seller’s business location. From the defined point of location, the buyer takes responsibility for the goods.
Carriage Paid To (CPT)
“Carriage paid to” means that the seller pays the freight for the carriage of the goods to the named destination. The risk of loss of or damage to the goods, as well as any additional costs due to events occurring after the time the goods have been delivered to the carrier, is transferred from the seller to the buyer when the goods have been delivered into the custody of the carrier.
Carriage and Insurance Paid To (CIP)
This term means that the seller delivers the goods to the carrier or another person nominated by the seller at a defined place and that the seller must contract for and pay the shipment costs to bring the goods to the named place of destination. The seller also contracts for insurance cover against the buyer’s risk of loss of or damage to the goods during the shipping. The buyer should note that under CIP the seller is required to obtain insurance only on minimum cover. Should the buyer wish to have more insurance protection, it will need either to agree as much expressly with the seller or to make its own extra insurance arrangements.
Delivered at Terminal (DAT)
In Delivered At Terminal, the terminal is the nominated place of destination, which has a crucial role in the shipping process. In DAT, the seller is responsible for the delivery of goods till the named port and the buyer liable for all charges from there onwards.
Initially, the nominated port at the location is acknowledged by both parties. At this port, the seller takes charge of unloading goods and the buyer looks after the import duties clearance. Once the seller unloads the goods at the named port, the risk moves in the hands of the buyer.
Delivered at Place (DAP)
This term means that the seller delivers when the goods are placed at the disposal of the buyer on the arriving means of transport ready for unloading at the named place of destination. Once goods are ready for shipment, the necessary packing is carried out by the seller at his own cost, so that the goods reach their final destination safely. All necessary legal formalities in the exporting country are completed by the seller at his own cost and risk to clear the goods for export. After the arrival of the goods in the destination country, the customs clearance in the importing country needs to be completed by the buyer at his own cost and risk, including all customs duties and taxes.
Delivered Duty Paid (DDP)
As per the shipping terms under DDP, the seller bears all costs & risks involved in delivering the goods to the nominated place. It is also the only term where the seller is liable for import custom payments.
A DDP arrangement favors the buyer since the seller handles most of the responsibilities. The place of delivery/place of destination plays a key role in DDP, as at this point all the costs and responsibilities shift from the seller to the buyer. The nominated place can be decided by both parties involved in the contract. It can either be the importer’s place or the port of the importer’s country.
Free Alongside Ship (FAS)
“Free Alongside Ship” means that the seller delivers when the goods are placed alongside the vessel (e.g., on a quay or a barge) decided by the buyer at the named port of shipment. The risk of loss or damage to the goods passes when the goods are alongside the ship, and the buyer bears all costs from that moment onwards.
The FAS term requires the buyer to clear the goods for export. It should not be used when the buyer cannot fulfill the export formalities.
Free on Board (FOB)
“Free on Board” means that the seller fulfills his obligation to deliver when the goods have passed over the ship’s rail at the named port of shipment. This means that the buyer has to cover all costs and risks of loss of or damage to the goods from that point.
The FOB term requires the seller to clear the goods for export.
Cost and Freight (CFR)
“Cost and Freight” mean that the seller must pay the costs and freight necessary to bring the goods to the named port of destination but the risk of loss of or damage to the goods, as well as any additional costs due to events occurring after the time the goods have been delivered on board the vessel is shifted from the seller to the buyer when the goods pass the ship’s rail in the port of shipment.
The CFR term requires the seller to clear the goods for export.
Cost, Insurance and Freight (CIF)
“Cost, Insurance and Freight” means that the seller has the same obligations as under CFR but with the addition that he has to procure marine insurance against the buyer’s risk of loss of or damage to the goods during the carriage. The seller contracts for insurance and pays the insurance premium.
Read more: FOB and CIF- Incoterms Explained
FREIGHT INSURANCE VS. FREIGHT LIABILITY
The buyer should note that under CIF the seller is required to obtain insurance only on minimum cover. Should the buyer wish to have more insurance protection, it will need either to agree as much expressly with the seller or to make its own extra insurance arrangements.
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Source: The Incoterms rules, 2010