Incoterms: who takes the risk?

What are Incoterms?

Incoterms are used when importing and exporting goods and are important because they are known and accepted worldwide. By agreeing on an Incoterm, you know who is responsible for arranging the transport, who is responsible for the costs and who bears the risk of damage to or loss of the goods during transport. Simply said, Incoterms are the trade terms that the buyer and seller of goods mutually agree on during international transactions.

What is the actual meaning of Incoterms? Incoterms is an abbreviation of the phrase “International Commercial Terms”. Incoterms are also known as international trade terms. The Incoterms are published by the International Chamber of Commerce (ICC) and relate to international trade law. These are always stated on the documents that are sent with the shipment. The exact place or time at which an obligation passes from the seller to the buyer is called a critical point (c.p.).

There are several Incoterms with different obligations for seller (exporter) and buyer (importer). We will walk through all of these.

Are Incoterms mandatory?

People often think that Incoterms govern the transfer of ownership of goods. This is not the case. The transfer of ownership is made by issuing the transport document or by contractual arrangements. Therefore, Incoterms are not mandatory. To receive legal effect, they must be explicitly incorporated by the parties into their contract.

EXW

EXW stands for Ex Works (… named place of delivery).

• The seller is solely responsible for getting the goods ready for pickup or to be released at his premises.

• The buyer holds full responsibility as soon as he has access to the goods (including loading) and bears the rest of the costs and risks related to the shipping process.

• The responsibility lies with the buyer when he has access to the goods, including loading.

Transfer of risk from seller to buyer:
At pick-up or release location.

FCA

FCA stands for Free Carrier (… named place of delivery).

• The seller must ensure that the goods are delivered to the buyer’s carrier at an agreed location and time. The costs are beared by the buyer.

• The seller is obliged to clear the goods for export.

Transfer of risk from seller to buyer:
Upon arrival at the buyer’s carrier.

CPT

CPT stands for Carriage Paid To (… named place of destination)

• The same sales responsibilities as with FCA, with one difference: the seller also pays the delivery costs.

• As with FCA, the seller’s responsibility is to clear the goods for export.

Transfer of risk from seller to buyer:
When the buyer’s carrier receives the goods.

CIP

CIP stands for Carriage and Insurance paid to (… named place of destination).

• Same seller responsibilities as CPT with one difference: the seller also pays for the insurance of the goods.

• The seller is obliged to pay the minimum cover.
• If the buyer wants a more extensive coverage, they must arrange this themselves.

Transfer of risk from seller to buyer:
When the buyer’s carrier receives the goods.

DAP

DAP stands for Delivered at place (named address/ place of destination).

• The buyer is responsible for all costs and risks associated with unloading the goods and clearing customs to import the goods into the named country of destination.
• The goods are noted as delivered when they arrive at the address and are ready for unloading.
• The seller clears the goods for export and bears all risks and costs associated with delivering the goods to the named foreign destination not unloaded.

Transfer of risk from seller to buyer:
When the goods are ready to be unloaded at the agreed address.

DPU

DPU stands for Delivered at place unloaded (…named place of destination). DPU is very similar to DAP except that the seller must pay for unlading the goods.

• The seller bears the costs and risks of transportation until the products are unloaded at the agreed final destination.
• It is the seller’s responsibility to clear the goods for export.

Transfer of risk from seller to buyer:
Upon arrival at the final destination.

DDP

DDP stands for Delivered Duties Paid (… named place of destination). DDP is a risky term for the seller, because they may not be fully aware of the import clearance procedures in the country of import or how to find a competent local customs broker. 

• The seller bears the costs and risks of transportation to the final destination, including the payment of Customs duties and taxes.
• It is the seller’s responsibility to clear the goods for export.

Transfer of risk from seller to buyer:
Upon arrival at the final destination.

FAS

FAS stands for Free Alongside Ship (… named port of shipment).

• The seller bears the costs and risks until the goods are delivered to the quay along a ship arranged by the buyer.

• It is the buyer’s responsibility to transport and clear the goods for export.

Transfer of risk from seller to buyer:
Upon arrival at quay/ port.

FOB

FOB stands for Free on Board (… named port of shipment).

• The seller bears the costs and risks until the goods are delivered on board of the ship.

• It is the seller’s responsibility to arrange the export license for the goods.

Transfer of risk from seller to buyer:
Upon loading on board.

CFR

CFR stands for Cost and Freight (… named port of destination)

• The seller bears the costs and risks until the goods arrive at the port of destination.

• It is the seller’s responsibility to clear the goods for export.

Transfer of risk from seller to buyer:
Upon arrival at the ship’s rail.

CIF

CIF stands for Cost, Insurance and Freight (… named port of destination)

• CIF is equal to CFR, with the difference that it includes an insurance obligation, which is at least equivalent to the conditions of the ICC. The seller bears the costs and risks until the goods arrive at the port of destination.

• It is the seller’s responsibility to clear the goods for export.

Transfer of risk from seller to buyer:
Upon arrival at the ship’s rail.