Incoterms in shipping benefit shippers, buyers and logistics service providers across the globe by standardising the trade contracts for international shipping through road, rail, sea, and air. These incoterms vary based on the mode of transportation, while there is a set of incoterms used for transport by trucks, trains and planes, a different set of incoterms are used in maritime shipping. These incoterms help define the terms in a trade contract to clarify the cost transfer, risk transfer and other responsibilities associated with international shipping. Let us learn more about incoterms in shipping.
What do you mean by incoterms in shipping?
Incoterms are commercial or foreign trade terms for seamless trade across the global shipping market. These terms are published by the International Chamber of Commerce (ICC) to prevent any uncertainty while drafting trade contracts. Incoterms are standardized terms used across the shipping industry for shippers and consignees to understand the exact responsibilities, obligations, terms and conditions of a specific trade agreement. There are diverse incoterms, some of which apply to the transit of goods via various modes of transport, while others are limited to maritime shipping. Incoterms act as guidelines or universally acknowledged rules that allow traders to set relevant conditions for trade and conduct smooth business across the borders.
Simply put, incoterms or foreign trade terms are terms used in the global shipping industry to define the ownership of goods between the owner and seller during transit. Incoterms also define the cost transfer and risk transfer between shipping parties at any point during shipping. Few of many incoterms used in the trade industry for shipping on rail, road, and air are- EXW (Ex Works), CPT (Carriage Paid to), CIP (Carriage and Insurance Paid to), DPU (Delivered at Place Unloaded), DDP (Delivered Duty Paid), FCA (Free Carrier), AND DAP (Delivered at Place). Incoterms used in maritime shipping include- FOB (Free on Board), CFR (Cost and Freight), and CIF (Cost, Insurance, and Freight).
Types of incoterms in shipping
In the case of shipping using trucks, trains, and planes, these terms are used across the global trade industry.
FCA—In a free carrier, the buyer sends their mode of transport, usually trucks, to the seller’s warehouse. The seller loads goods on the buyer’s mode of transport. After clearing the goods for export, the seller flags the consignment, and all costs, risks, and ownership of the goods are switched to the buyer.
CPT—In carriage paid to, the trade contract defines that the seller is responsible only for payment of transportation charges and no insurance. The buyer is responsible for the risks of goods after the seller has delivered them to a carrier.
EXW- Ex works is a contract where the seller bears the least responsibility by making the consignment available to the shipper at the chosen location, where the buyer picks up the goods and bears all costs and risks associated with the shipment.
DDP—Under delivery duty paid, the seller takes full responsibility, including the costs and risks associated with cargo transportation up to the buyer’s destination. The buyer takes ownership and responsibility once the goods are delivered. In the case of maritime shipping, the incoterms taken into consideration are-
FOB- Free on board is a trade contract that uses two types of agreement. FOB origin and FOB destination where FOB Origin defines the transfer of risks and costs once the seller ships the goods to the carrier. FOB destination is where the seller is responsible for the risks and bears all costs until the goods reach their destination.
CFR—Cost and freight is a trade contract in which the cost transfer occurs when the goods reach the buyer. Up to that point, the seller bears all transportation and handling costs. However, risk transfer occurs when the seller hands the consignment to the carrier.
CIF- Under cost, insurance, and freight, the terms of the trade contract are like CFR, but the seller also pays a part of it for the cargo insurance.
Importance of incoterms in shipping
Incoterms are necessary in shipping as they help define the transfer of responsibilities between buyer and seller. Let’s now learn about the importance of incoterms in shipping.
Implementing uniformity—Communication barriers are one of the biggest challenges in international trade. Incoterms help establish uniformity in trade contracts by setting standard rules and obligations for trade. They also help prevent misinterpretation and disputes regarding risk settlement or payment of shipping charges.
Allocating risk transfer- The role of incoterms in shipping is to define the risk transfer from the shipper to the consignee during transportation. It helps logistics service providers inform the responsible shipping party in case of claiming cargo insurance due to cargo theft or any other shipping accidents.
Cost allocation—Incoterms in trade contracts help determine the cost transfer between shipping parties at any point during transportation. They also help define which party is responsible for detention and demurrage fees.
Reduces risk of disputes- Incoterms help draft clear trade contracts to allow shippers, consignees and 3PL or 4PL service providers to carry out seamless international trade. Legal documents clearly define the liabilities and roles of all shipping parties, decreasing the likelihood of any disputes or legal actions.
These are the important incoterms in shipping that allow buyers, shippers, and logistics service providers to avoid misunderstandings or disputes during the international transportation of goods.
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