28. Incoterms (FOB, CIF, etc.)
International Commercial Terms Explained
What Are Incoterms?
Incoterms (International Commercial Terms) are a set of standardized trade terms published by the International Chamber of Commerce (ICC) that define the responsibilities, costs, and risks shared between buyers and sellers in international and domestic contracts for the sale of goods. They clarify who pays for shipping, insurance, customs clearance, and when risk transfers from seller to buyer.
First published in 1936, Incoterms are widely recognized and updated periodically (latest version is Incoterms 2020).
Why Are Incoterms Important?
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Avoid misunderstandings: Clearly defines logistics responsibilities.
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Reduce legal risks: Provides a common international language in contracts.
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Clarify cost and risk: Helps allocate who pays for freight, insurance, and duties.
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Facilitate smooth transactions: Ensures all parties know when ownership and liability shift.
Commonly Used Incoterms
1. FOB (Free On Board)
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Use: Mainly for sea and inland waterway transport.
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Seller’s responsibility: Deliver goods onto the vessel nominated by the buyer at the named port of shipment.
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Risk transfer: From seller to buyer when goods pass the ship’s rail (onboard the vessel).
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Costs: Seller pays export clearance and loading costs; buyer pays main freight, insurance, unloading, and import duties.
2. CIF (Cost, Insurance, and Freight)
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Use: Sea and inland waterway transport.
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Seller’s responsibility: Pays costs, insurance, and freight to bring goods to the named port of destination.
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Risk transfer: Risk passes to buyer once goods are loaded on the vessel at origin port.
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Costs: Seller covers transport and insurance; buyer handles unloading, customs, and onward transport.
3. EXW (Ex Works)
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Use: Any mode of transport.
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Seller’s responsibility: Makes goods available at their premises (factory, warehouse).
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Risk transfer: Passes to buyer at seller’s premises.
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Costs: Buyer bears all costs and risks from seller’s premises onwards.
4. DDP (Delivered Duty Paid)
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Use: Any mode.
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Seller’s responsibility: Delivers goods to buyer at the named place in the buyer’s country, cleared for import and all duties paid.
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Risk transfer: At delivery point.
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Costs: Seller bears all transport, duties, and risks up to delivery.
5. FCA (Free Carrier)
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Use: Any mode.
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Seller’s responsibility: Delivers goods, cleared for export, to carrier or another party nominated by buyer at named place.
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Risk transfer: Upon delivery to the carrier.
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Costs: Seller handles export clearance and delivery to carrier; buyer handles main transport.
6. CPT (Carriage Paid To)
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Use: Any mode.
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Seller’s responsibility: Pays freight to bring goods to named destination.
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Risk transfer: Upon handing goods to first carrier.
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Costs: Seller pays freight; buyer assumes risk after first carrier.
7. CIP (Carriage and Insurance Paid To)
Understanding Risk vs Cost
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Risk transfer means the point at which the buyer assumes liability for loss or damage.
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Cost transfer means which party pays for the transportation, insurance, duties, and other expenses.
Summary Table of Key Incoterms
| Incoterm | Mode of Transport | Seller’s Main Responsibilities | Risk Transfer Point | Buyer’s Responsibilities |
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| EXW | Any | Make goods available at premises | At seller’s premises | All transport and export/import costs |
| FOB | Sea and inland waterways | Load goods on vessel at named port | When goods cross ship’s rail | Freight, insurance, import duties |
| CIF | Sea and inland waterways | Pay freight and insurance to destination port | When goods cross ship’s rail | Unloading, customs clearance |
| DDP | Any | Deliver goods cleared for import at destination | At named delivery point | None (except after delivery) |
| FCA | Any | Deliver goods to carrier at named place | At delivery to carrier | Main carriage and import duties |
| CPT | Any | Pay carriage to destination | At delivery to first carrier | Insurance and import duties |
| CIP | Any | Pay carriage and insurance to destination | At delivery to first carrier | Import duties |
How to Use Incoterms Effectively
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Always specify the Incoterm followed by the named place (e.g., FOB Shanghai Port, DDP Berlin Warehouse).
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Ensure both buyer and seller fully understand obligations and risk transfer points.
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Use Incoterms appropriate for the mode(s) of transport involved.
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Remember Incoterms cover only delivery and risk, not ownership or payment terms.
Summary
Incoterms are a fundamental element of international trade that clearly define who does what, who pays what, and when risk passes in the shipping process. Proper use of Incoterms reduces disputes, clarifies logistics responsibilities, and streamlines global commerce.
