Humans have been trading goods for thousands of years. But different trade practices and legal interpretations between countries have led to a lot of complications. Over time, we realized the need for a common set of rules to simplify the contractual agreements between buyer and seller. A small misunderstanding with these shipping terms can lead to disputes over overseas freight, insurance, and custom clearance.
To prevent such misunderstandings, the International Chamber of Commerce (ICC) defined a set of International Commercial Terms (Incoterms). These shipping terms help to clearly define the responsibilities associated with the transportation and delivery of goods.
In this article, we'll look at some important shipping terms and how they differ from one another. As a transportation professional, you'll need to be fluent in this terminology—especially now that so much paperwork has been digitized and can therefore be completed more quickly. These days, an abbreviation can zip right by you!
Ex-works (EXW) means the seller is responsible for making the goods available at their factory or warehouse. Doing this will fulfill the seller's obligation.
After this point, the buyer needs to collect the goods and clear them through customs. The buyer is also responsible for administrative work for the export. Thus, this contract places the minimum obligation on the seller. Meanwhile, the buyer has to bear the cost and risk for international transport, export clearance, insurance, and logistics from the port to destination.
Free carrier (FCA) means the seller is responsible for delivering the goods—either to the buyer's carrier or to another party the buyer nominates. Thus, the seller has to pass the cargo through customs and clear it for export. The seller is also responsible for the transport of cargo until the chosen place of delivery.
The two parties should clearly define the obligations of loading and unloading at the delivery address. This will clarify who unloads from the seller's transport and who loads the goods onto the buyer's truck or other equipment. After this exchange, the buyer is responsible for all the costs of transport and bears the risk for any damage to the goods.
Free on Board (FOB) means the seller is responsible for delivering the cargo to the originating port and loading it onboard. After the loading is complete, the cost and risk of the goods pass from seller to buyer. However, the seller must also arrange for export clearance. Apart from that, everything else is the buyer's obligation. The buyer must bear the cost of freight transport and transportation from the arrival port to destination. Moreover, the buyer must also pay for the bill of lading, insurance, and unloading.
Free Alongside Ship (FAS) means the seller is responsible for delivering the goods to the buyer's carriage at the originating port. However, unlike Free on Board, the seller isn't responsible for loading the goads onboard. The rest of the obligations for both buyer and seller are similar to FOB. The seller must arrange to clear the customs for export. The buyer must bear all costs of freight transport and risks of loss or damage to the goods from the originating port till the destination.
Cost and Freight (CFR) means the seller is responsible for delivering the goods to the port of destination. This refers to the port where the buyer resides and will receive the goods. Moreover, the seller must organize and pay for the freight transport of the goods to this port of destination. However, the buyer must bear the cost of insurance and the risk of loss of or damage to the goods. The buyer is then responsible for unloading costs, import haulage, customs clearance, and transportation costs to the destination.
Cost, Insurance, and Freight (CIF) means the seller is responsible for delivering the goods to the port of destination and is also responsible for insurance for the goods while in transit. This differentiates it from Cost and Freight (CFR), where the buyer is responsible for the cargo insurance. However, it's still the buyer that bears the risk of loss or damage to the goods while in transit. The risk transfers once the goods are loaded at the originating port. The seller must also clear the goods for export.
When you see Carriage Paid to (CPT), that means the seller is responsible for arranging the carriage that will transport the goods to the destination. The seller must pay for the export clearance and freight costs for the transport to the destination. This destination might be the buyer's facility or the port of destination. However, the risk of loss or damage of goods transfers to the buyer once the seller delivers the goods to the carrier. Thus, the seller isn't obligated by the contract to insure the goods while in transport.
Carriage and Insurance Paid to (CIP) means the seller is responsible for arranging the carriage that will transport the goods to the destination and must also pay for this transport. The risk of loss or damage of goods transfers to the buyer once the seller delivers the goods to the carrier. However, this is different from Carriage Paid to (CPT). Why? Because in CIP, the the seller must pay for the insurance of the cargo while in transit. The seller must also clear the goods for export.
Delivered Duty Paid (DDP) means it's the seller's responsibility to deliver the goods to the pre-decided place in the buyer's country. The seller is responsible for paying for the international freight transport of the goods to this destination. The seller is also responsible for clearing the exports at departure as well as passing the imports at the arrival port. This means the seller is responsible for clearing the customs in the buyer's country. Moreover, the seller also pays the import duties and taxes. The seller also bears the risk for the goods throughout this process until the buyer receives them for unloading. Thus, Delivered Duty Paid (DDP) places maximum obligations on the seller and minimum obligations on the buyer.
Delivered at Place (DAP) means that the seller is responsible for organizing and delivering the goods at a pre-decided place. It was formerly known as delivered duty unpaid (DDU). This is because, unlike in Delivered Duty Paid (DDP), the buyer is responsible for arranging the custom clearance and paying for import duties and local taxes. However, the seller still has to pay for the international transport and has to clear the cargo for exports. The seller also bears the risk of loss or damage of goods until the goods are available for unloading at the destination.
Delivered at Place Unloaded (DPU) means the seller is responsible for delivering the goods and unloading them at the pre-decided port or place of destination. The place of destination could be a port, an inland terminal, a freight interchange, an airport, or a forwarder’s warehouse. Unlike DAP and DDP, where it was enough to make the goods available for unloading, DPU requires the seller to unload the goods in order to complete delivery. However, similar to DAP and DDP, DPU requires the seller to clear the goods for export and bear all risks and costs associated with transporting the goods to the place of destination. The buyer is responsible for clearing the goods for import and paying the duties and taxes.
These key shipping terms (or Incoterms) help sellers and buyers understand their responsibilities. They provide globally accepted rules that clearly define the obligations of each party and the transfer of risk during delivery. Thus, having a clear understanding of these shipping terms is critical for logistics experts and other transportation professionals.
This post was written by Aditya Khanduri. Aditya currently handles product and growth at Cryptio.co, and he's also built a couple of B2B products. He's proficient in data analysis with Python and has worked with multiple startups in the blockchain and artificial intelligence sector.