Here is our how-to guide to the most common trading terms in shipping.
Incoterms
In international trade, language can add complexities. To overcome some of these complexities, a common language for when the ownership of traded goods passes from the seller to the buyer are imperative. The trading terms should be agreed between a buyer and seller at the beginning of the commercial engagement and ideally documented in a commercial agreement or contract. This can be used for later reference in establishing, who is responsible for arranging and paying which part of the shipping process.
International Commercial Terms (Incoterms), published by the International Chamber of Commerce since 1936, is a recognized standard used worldwide in international contracts for sales of goods. The latest version came into effect January 2011 (version 2010). Searching the Internet you will be able to find numerous illustrations explaining the passing of risk and cost from seller to buyer for different Incoterms. We will try to briefly introduce a few of the most common Incoterms below.
Ex-Works (EXW)
Ex-works (EXW) is one of most basic shipping arrangements between seller and buyer. Under these terms, the seller simply must make the goods available at his or her factory or warehouse for the buyer to collect in order to fulfil his or her obligation. All cost and risk for the international transportation, including export customs clearance and insurance are therefore with the buyer.
Free Carrier (FCA)
Free carrier (FCA) terms mean that the seller must hand over the cargo to the first carrier nominated by the buyer. In practical terms, this would mean that the seller is responsible for export haulage to the freight forwarder warehouse and customs clearing the cargo, and the importer is responsible for all costs after that point, including any origin charges.
Free On Board (FOB)
Free on board (FOB) is a common Incoterm where the cost and risk of the goods pass from seller to buyer when the cargo has passed over the ship’s rail at the named port of loading. The seller has therefore fulfilled his or her obligation and the buyer bear all cost and risks of loss or damage to the goods from that point onwards.
Cost And Freight (CNF)
Under cost and freight (CNF/C&F/CFR) terms, the seller is responsible for bringing the goods to the port of destination. The buyer is therefore responsible for any destination charges and import haulage, customs clearance at destination and cargo insurance.
Cost, Insurance, And Freight (CIF)
Cost, insurance and freight (CIF) is similar to CNF, except in this case the seller is responsible for the cargo insurance.
Delivered at Place Unloaded (DPU)
Delivered at Place Unloaded (DPU) – previously known as Delivered At Terminal (DAT) – means that the seller pays for transportation till and including the destination terminal. That means the seller would pay for both ocean freight and any destination charges, but not customs clearance, which is for the account of the buyer.
Delivered At Place (DAP)
For delivered at place (DAP) – formerly known as delivered duty unpaid (DDU) – the seller is responsible for arranging the delivery to the buyer at an agreed location, and the buyer is only responsible arranging and paying for customs clearance and any customs duties at the destination.