Incoterms and International Transportation of goods

With the advancement of international trade, various operational means had to be universally implemented in negotiations around the world. With this purpose in mind, a manual containing ready-made clauses regarding the responsibility for the transportation of goods was created: the ICC’s Incoterms.

It’s of utmost importance for international traders to have knowledge of these terms, which will be presented here.

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Author: Leonardo Almeida Lacerda de Melo

ICC and the Origin of Incoterms

The International Chamber of Commerce (ICC), settled in Paris, is a global organization founded in 1919 with the aim of preserving globalized and systematized international trade. As the world’s largest business organization, it represents various companies worldwide at all levels of commerce.

Currently, the ICC acts as a beacon for international commerce procedures, having its own Arbitration Court for conflict resolution and thus becoming one of the most respected entities on the planet.
The organization’s idea is to promote the most favorable environment for international commerce, using its influence to shape government policies and regulations in order to promote the best possible commercial scenario.

With this goal in mind, the ICC released in 1936 what would be the first manual of logistics clauses in international commerce. This manual introduced the world to the INCOTERMS (International Commerce Terms), a set of objective and easily understandable clauses that clearly define the responsibilities of both parties in an international purchase and sale contract regarding the transportation of goods.

How Incoterms Work

As mentioned earlier, Incoterms are ready-made, objective, and clear clauses with the sole purpose of clearly defining the logistics responsibilities of the parties in an international purchase and sale contract. The Incoterms manual is updated every 10 years, with the latest version, as of the date of this post, being made available by the ICC in 2020.

The idea behind the clauses presented in the manual is to define who is responsible for each stage of the freight, where the goods will be delivered, and which party takes responsibility for any damage to the exported goods. With this intention, the manual seeks to identify points of higher risk of goods accidents, such as loading, clearly defining the responsibility at each stage of the process.

Let us now examine the Incoterms present in the 2020 book, divided into the categories E (Ex), F (Free), C (Carriage), and D (Delivery).

Incoterms: Category E (Ex)

This category has only one representing Incoterm, which is Ex Works (EXW), as shown below.

Ex Works (EXW)

In this Incoterm, all responsibility related to transportation, clearance, and insurance is borne by the Importer. The goods will be made available at the Exporter’s premises. Any mode of transportation can be used, including multiple modes if agreed upon by the parties.

Incoterms: Category F (Free)

This category includes the Incoterms Free Carrier (FCA), Free Alongside Ship (FAS), and Free On Board (FOB). The idea of this category is to transfer to the Importer the responsibility for the main carriage (between countries) and international insurance.

Free Carrier (FCA)

In this Incoterm, the Exporter is responsible for transportation to the designated place of delivery prior to the port or airport, as well as export clearance. The Importer assumes the responsibility and risk of transportation to the port/airport, loading, and all logistics to its destination. This Incoterm is valid for any mode of transportation agreed upon by the parties.

Free Alongside Ship (FAS)

In this case, for exclusively maritime transportation, the Exporter is responsible for the logistics and risk of the goods until they are alongside the ship, where the Exporter’s obligations end when the goods are ready for loading. It is important to note the distinction between keeping the goods awaiting shipment and actually loading them, as this procedure is one of the previously mentioned points of risk. Additionally, the Exporter is responsible for export clearance. On the other hand, the Importer bears the costs and risks for the remaining transportation.

Free On Board (FOB)

Being one of the most common Incoterms in the market and, like FAS, exclusively for maritime transport, in this Incoterm, the Exporter’s responsibility extends to the delivery of the goods on board the ship. The Exporter is also responsible for export clearance. The Importer handles the waterborne transportation to its destination, including costs and risks. As can be observed, the only difference between FOB and FAS is the party assuming the risk and cost of loading the goods onto the ship responsible for the maritime leg of the transport.

Incoterms: Category C (Carriage)

Here are the Incoterms Carriage Paid To (CPT), Carriage and Insurance Paid To (CIP), Cost and Freight (CFR), and Carriage, Insurance, and Freight (CIF). The idea of this category is to transfer the costs related to the main carriage (between countries) to the Exporter. In this category, differences in costs and responsibilities between the parties arise, so it is valid to define the distinction between risk, which is the party assuming responsibility for any damage to the goods, and cost, which is the party responsible for covering the expenses of the stage.

Carriage Paid To (CPT)

In this Incoterm, the Exporter will bear the COSTS related to transportation to the port/airport, as well as the loading of the goods and their freight to the destination country (main carriage). However, the Exporter’s RISKS end upon delivering the goods to the main carrier (who will handle the international freight).

Therefore, although the main transportation is paid for by the Exporter, the risks are borne by the Importer, who must obtain international insurance, as well as cover all unloading, import clearance, and transportation to its destination. Any mode of transportation can be used.

Carriage and Insurance Paid To (CIP)

In this case, the responsibilities for COST and RISK are the same as in the CPT Incoterm, meaning the Exporter covers the costs until the completion of the main carriage, but the risk of the main carriage falls on the Importer, who also covers unloading and transportation to its destination and handles import customs clearance. The difference lies in the international insurance, which, in this case, must be paid for by the Exporter. Any mode of Transportation can be used.

Cost and Freight (CFR)

In this Incoterm, the Exporter covers the costs of transportation to the destination port in the Importer’s country, while its risk is limited to the loading of the goods. The Importer is responsible for international insurance, risks of the main carriage, as well as unloading, import clearance, and the remaining transportation to its destination. The subtle difference between CFR and CPT lies in the mode of transportation: CFR is exclusively for maritime transport.

Cost, Insurance, and Freight (CIF)

Considerably common, in this Incoterm, the Exporter is responsible for the costs of transportation to the destination port in the Importer’s country, bearing the risks until the goods are loaded onto the ship responsible for the main carriage. However, unlike CFR, the Exporter must arrange international insurance for the main carriage of the goods.

The Importer handles unloading, clearance, and transportation to its destination and assumes risks from the time the goods are loaded onto the ship (throughout the main carriage, which was insured by the Exporter). The only difference between CPT and CIF is that the latter is exclusively for maritime transport.

Incoterms: Category D (Delivery)

Represented by the Incoterms Delivered at Place (DAP), Delivered at Place Unloaded (DPU), and Delivered Duty Paid (DDP), in this category, the Exporter assumes the risks and costs of international transportation to the destination port. All modes of transportation can be used for the Incoterms in this category.

Delivered at Place (DAP)

In this Incoterm, the Exporter is responsible for and covers the costs of transportation to the destination port/airport. The Importer takes charge of unloading the goods (a critical point), import clearance, and overland transportation to its destination.

Delivered at Place Unloaded (DPU)

This Incoterm provides for the Exporter’s responsibility until the goods are unloaded, which the Exporter will fund and assume the risks until arrival at the destination port/airport, including unloading. The Importer, therefore, handles import clearance and overland transportation to its destination.

Delivered Duty Paid (DDP)

In this Incoterm, the entire responsibility and risk of transportation, as well as export and import clearance, must be borne by the Exporter, who shall deliver the goods at the Importer’s destination.

The Necessity for Specialized Representation in Negotiations

As demonstrated, international transportation logistics have several critical points where clarity regarding each party’s responsibility is necessary. Therefore, it is essential to seek the assistance of specialized lawyers in negotiating the export contract, such as those from Koetz Advocacia, who can analyze the defined logistics terms.