International trade involves complex processes and responsibilities shared between buyers and sellers. To simplify this, Incoterms, short for International Commercial Terms, provide a globally accepted framework that defines each party’s duties, costs, and risks during the shipping process. Before engaging in any cross-border shipment, it’s crucial to understand these terms thoroughly.

First introduced by the International Chamber of Commerce (ICC) in 1936 and regularly updated, the latest being in 2020, Incoterms standardize trade terms used globally. They clarify key aspects of international shipping including:

• Delivery responsibilities
• Transfer of risk
• Insurance obligations
• Export/import duties
• Logistics and transportation costs

Incoterms are not just technical jargon for legal documents, they are essential guidelines used across global trade to ensure clarity and minimize disputes. From international corporations to small exporters, Incoterms help define responsibilities and reduce costly misunderstandings during the shipping process. Whether goods are being transported by land, sea, or air, these terms act as a common language understood by all parties involved in logistics. Incoterms are directly used by buyers and sellers in trade contracts. Indirectly, they’re essential to:

• Freight forwarders
• Customs brokers
• Logistics service providers
• Insurance companies
• Banks and legal advisors

Free On Board (FOB)

Under FOB, the seller is responsible for all costs and risks until the goods are loaded safely onto the vessel nominated by the buyer at the designated port of shipment. This includes inland transportation, customs clearance, and port handling charges at origin. Once the cargo is onboard, the buyer assumes full responsibility, covering the sea freight, insurance, unloading at the destination port, and any onward transport.

Cost and Freight (CFR)

In CFR, the seller arranges and pays for transporting the goods to the destination port. However, the risk transfers to the buyer once the goods are loaded onto the vessel at the port of origin. This means that while the seller handles most logistics and freight costs, the buyer assumes risk during the voyage and is responsible for insurance, unloading, and further transportation.

Cost, Insurance, and Freight (CIF)

CIF is similar to CFR with one key difference, the seller must also procure insurance for the goods during transit, offering the buyer basic coverage against loss or damage while en route. The seller pays for export duties, local transport, port handling, ocean freight, and insurance, while the risk still passes to the buyer once the goods are onboard the vessel.

Free Alongside Ship (FAS)

With FAS, the seller fulfills their obligation when the goods are placed alongside the vessel (at the dock or quay) at the named port of shipment. From this point onward, the buyer bears all costs and risks, including loading onto the ship, sea freight, insurance, and all import formalities. FAS requires the buyer to have a strong presence or agent at the port to take over the shipment.

Ex Works (EXW)

EXW places the minimum responsibility on the seller. The seller makes the goods available at their premises (factory, warehouse, or office), and from that point, the buyer assumes full responsibility for transportation, customs clearance, duties, and insurance. The seller is not required to load the goods or handle any part of the export process.

Delivered Duty Paid (DDP)

DDP is the most seller-responsible term among all Incoterms. The seller handles everything, export formalities, main transport, import customs clearance, duties, taxes, and final delivery to the buyer’s specified location. The buyer simply receives the goods at the agreed site without any administrative or financial involvement in the shipping process.

Free Carrier (FCA)

In FCA, the seller delivers the goods, cleared for export, to a location and carrier specified by the buyer. This could be the seller’s premises, a shipping terminal, or another agreed place. Once the goods are handed over to the carrier, risk and responsibility shift to the buyer.

Carriage Paid To (CPT)

Under CPT, the seller arranges and pays for the shipment to reach a named destination, but risk transfers to the buyer as soon as the goods are handed over to the main carrier. The buyer is responsible for insurance, customs clearance at destination, and any further delivery steps beyond the agreed point.

Carriage and Insurance Paid To (CIP)

CIP expands on CPT by requiring the seller to also arrange and pay for insurance. While the risk still passes to the buyer when goods are handed over to the first carrier, the seller must provide minimum insurance coverage (typically 110% of the goods’ value) during the main leg of the journey.

Delivered at Place (DAP)

With DAP, the seller is responsible for delivering the goods to the buyer’s location or another agreed destination, excluding import duties and customs clearance at destination. The seller manages all origin-related logistics, including export clearance and main transportation. The buyer only needs to handle import procedures and associated costs.

Delivered at Terminal (DAT)

In the Incoterms 2020 revision, DAT has been replaced by DPU (Delivered at Place Unloaded). However, if a contract still uses DAT, it refers to the seller delivering the goods, fully unloaded, at a terminal, warehouse, or agreed facility at the destination. The buyer handles import customs duties and onward transport.