What are Incoterms?

Incoterms were drawn up by the International Chamber of Commerce. They are internationally recognised for all foreign cargo shipments. An incoterm refers to the following

• Costs: It identifies who is responsible for the expenses (shipping costs, insurance, customs duties, storage, etc) involved in a shipment from a given point in the shipment’s journey.
• Control: It identifies who owns the goods at a given point in the shipment from one place to another.
• Liability: It identifies who is responsible for paying damage to goods at a given point in a shipment’s transit.

Frequently used Incoterms

 There are 13 incoterms, but we will look at only some of the incoterms that are used more frequently.

EXW

Ex Works  This incoterm means that the shipper pays none of the costs. The consignee has to arrange and pay for the shipment of the goods from the shipper’s premises to his own. In our example this means that the consignee (Sainsburys) arranges the entire shipment from the cannery at Ashton to the Sainsbury’s premises in Britain. This includes insurance, shipping costs, and land transport costs from Ashton to Cape Town container terminal and from London Gateway container terminal to Sainsbury’s warehouse.

The diagram above shows that, if a consignment is shipped using the incoterm EXW, the consignee is responsible for all costs and insurance from the door of the shipper’s premises.

FAS

Free alongside ship  This incoterm means that the shipper pays all the costs up to the time the cargo arrives at the container terminal. The consignee has to arrange and pay for the shipment of the goods from the time the cargo passes over the ship’s gunwale until it arrives at his own premises. In our example this means that the shipper (the cannery at Ashton) arranges and pays the costs of the moving the cargo from the cannery to the container stack in the Cape Town container terminal. The consignee (Sainsbury’s) pays for the costs of insurance, shipping costs, customs duties and land transport costs from the time the cargo passes over the ship’s gunwale, until it arrives at Sainsbury’s premises in Britain. This includes the transport costs from London Gateway container terminal to Sainsbury’s warehouse.

The diagram above shows that, if a consignment is shipped using the incoterm FAS, the shipper is responsible for all costs and insurance up to the time the cargo reaches the side of the ship. The consignee is responsible for all costs and insurance from that point until his own premises.

FOB

Free on Board   This incoterm means that the shipper pays all the costs up to the time the cargo passes over the ship’s gunwale. The consignee has to arrange and pay for the shipment of the goods from the time the cargo has passed over the ship’s gunwale until it arrives at his own premises. In our example this means that the shipper (the cannery at Ashton) arranges and pays the costs of the moving the cargo from the cannery to it being loaded aboard the ship in Cape Town. The consignee (Sainsbury’s) pays for the costs of insurance, shipping costs, customs duties and land transport costs from the time the cargo is aboard the ship, until it arrives at Sainsbury’s premises in Britain. This includes the transport costs from London Gateway container terminal to Sainsbury’s warehouse. Because the consignee is paying for the shipping leg, the consignee can dictate regarding the ship on which the cargo will be shipped.

The diagram above shows that, if a consignment is shipped using the incoterm FOB, the shipper is responsible for all costs and insurance from the door of the shipper’s premises until the cargo is “over the gunwale”, i.e. it is aboard the ship. The consignee is responsible for all costs and insurance from the time the cargo is aboard the ship until it arrives at his premises.

CIF

Costs of Insurance and Freight  This incoterm means that the shipper pays all the costs until it arrives at the consignee’s premises. In our example this means that the consignee (Sainsbury’s) pays for the costs of insurance, shipping costs, customs duties and land transport costs from the cannery at Ashton, until it arrives at Sainsbury’s premises in Britain. Because the shipper is paying for the shipping leg, the shipper can dictate regarding the ship on which the cargo will be shipped.

The diagram above shows that, if a consignment is shipped using the incoterm CIF, the shipper is responsible for all costs and insurance from the door of the shipper’s premises until it arrives at the port of discharge. The consignee is responsible for the costs and insurance until the cargo arrives his premises.

•  DDU  Delivered Duty Unpaid   This incoterm means that the shipper pays all costs (except customs duties) until the cargo arrives at the premises of the consignee. In our example, the cannery at Ashton pays all costs (except customs duties) until the cargo arrives at Sainsbury’s premises.
• DDP   Delivered Duty Paid  This incoterm means that the shipper pays all costs (including customs duties) until the cargo arrives at the premises of the consignee. In our example, the cannery at Ashton pays all costs (including customs duties) until the cargo arrives at Sainsbury’s premises.

The diagram above shows that, if a consignment is shipped using the incoterm DDP, the shipper is responsible for all costs, insurance and customs duty from the door of the shipper’s premises until the cargo arrives at his premises.

Also shown is the arrangement that, if a consignment is shipped using the incoterm DDU, the shipper is responsible for all costs, and insurance (but excluding customs duty) from the door of the shipper’s premises until the cargo arrives at his premises.