International Freight Incoterms - A Complete Guide

Incoterms, also known as Freight Incoterms, are the terms used in sales contracts for businesses involved in importing and exporting. These terms are introduced by the International Chamber of Commerce (ICC). The terms help define the liability and responsibility for the goods throughout the shipment.

In simple terms, it outlines when the responsibility for the goods or shipment lies with the buyer and when it lies with the seller. It also helps in defining the documentation and insurance required for the shipment.

Since every trade transaction is different based on the mode of transport, destination country, shipping arrangements and agreements between the parties, a single rule cannot apply to all situations. Incoterms help avoid misunderstandings, ensure smooth logistics operations and provide clarity.

• Different Incoterms help businesses choose trade terms based on the mode of transport, such as sea, air, rail or road.
• Incoterms reduce the chances of disputes and confusion between importers and exporters during international transactions.
• Incoterms simplify global trade communication by using universally accepted shipping terms.
• They help businesses plan logistics operations and manage international shipping more efficiently.

Incoterms are classified into two main categories based on the transportation needs. Each category consists of different Incoterms that define the responsibilities, risks and costs shared between buyers and sellers. Let us understand in detail the different Incoterms in each category.

Incoterms Rules for Any Mode of Transport

These are versatile Incoterms rules applied for the goods shipped via any mode of transport, such as land, water, air or sea. These Incoterms rules are helpful and handy in international trade where multiple modes of transport are involved. Let us discuss different Incoterms that come under this category.

• EXW (Ex Works): Under this Incoterm, the buyer assumes the primary responsibility. The seller's job is to make goods available at the designated location while the buyer handles all export, shipping, and import processes.
• FCA (Free Carrier): The seller is responsible for delivering the goods to the buyer's location and clearing them for export. After handover, the buyer will assume the risks and other related costs for the goods.
• CPT (Carriage Paid To): The seller pays the transportation cost to deliver the goods to the agreed destination. However, the risk transfers to the buyer once the goods are handed over.
• CIP (Carriage and Insurance Paid To): Under this, the seller pays for the transportation cost and insurance coverage of goods up to the agreed destination. The risk transfers to the buyer upon delivery of the goods to the carrier.
• DAP (Delivered at Place): The seller’s job is to deliver the goods ready for unloading at the agreed-upon buyer’s location. From there, the buyer’s job is to manage the unloading and other costs associated with goods.
• DPU (Delivered at Place Unloaded): Under this Incoterm, the seller handles transportation and unloading of goods at the specified destination. The buyer takes responsibility after unloading is completed.
• DDP (Delivered Duty Paid): The seller assumes the greatest responsibility. The seller's job is to manage transportation, export and import formalities, customs duties and delivery of goods to the buyer’s destination.

Incoterms Rules for Sea and Inland Waterway Transport

These Incoterms rules are applied to goods shipped exclusively by sea and inland waterways. They consider the unique nature of maritime transport, such as port-handling risks and costs. Let us discuss the Incoterms that fall under this category.

• FAS (Free Alongside Ship): The seller’s responsibility is to deliver the goods alongside the buyer’s vessel at the port of shipment. While the buyer’s job is to handle the loading, transport and other costs.
• FOB (Free On Board): The seller must clear the goods for export and then load them into the buyer's vessel. The risk of the goods will transfer to the buyer when the goods are on board.
• CFR (Cost and Freight): The seller is responsible for arranging and paying the freight charges required to transport the goods to the destination port. The risk transfers to the buyer once the goods are loaded onto the vessel at the port of shipment.
• CIF (Cost, Insurance, and Freight): Under this, the seller pays for freight charges to the destination port and also provides insurance coverage for the goods during sea transit. The risk transfers to the buyer once the goods are loaded onto the vessel.

Finding the right Incoterm for your business can be difficult if you do not know the nature of the transport, the risks and other factors. To ease the process, businesses should consider several factors when choosing the right Incoterms.

• Understand your Logistic Needs: Businesses must know their logistic needs. By understanding the logistics requirements, you can choose the Incoterm that best matches your shipping capabilities.
• Consider the Transportation Method: Mode of transportation is another important factor to consider. If you are transporting by ship, it is best to use a maritime-specific Incoterm; for air or land, you can use any Incoterm.
• Evaluate Total Delivered Costs: Knowing the different costs, such as transportation, insurance, customs, etc., under Incoterm is also essential. This will help you decide which term fits your budget.
• Assess Risk Tolerance: Different Incoterms transfer risks at different stages of transportation. Businesses should choose a term based on the level of risk they are willing to handle during the shipment process.
• Evaluate Insurance Capabilities: Determine whether the buyer or seller can arrange suitable insurance coverage for the goods during transit. Some Incoterms also require the seller to provide insurance protection.
• Consider Custom Experience: Businesses involved in international trade should evaluate their expertise in handling export and import customs procedures, documentation and compliance before selecting an Incoterm.

Also Read: Marine Insurance Clauses: Key Terms & Coverage Explained

Businesses involved in international trade need to know that not everything is covered under the Incoterms. There are various aspects of trade contracts which are not covered under Incoterms, some of which are listed below:

• Incoterms do not define the transfer of ownership or property rights of the goods between the buyer and seller.
• They do not specify payment terms, payment methods or financial arrangements between trading parties.
• Incoterms do not cover issues related to contract breaches or legal disputes arising from the trade agreement.
• They do not address liability related to the quality, condition or performance of the goods being traded.
• Incoterms do not protect against delays caused by external factors such as political issues, strikes or natural disasters.
• They do not include detailed provisions regarding customs compliance laws or regulatory requirements of different countries.

Here are some common mistakes businesses should avoid when choosing an Incoterm.

• Using DDP without Understanding Tax Implications: Under DDP, sellers are responsible for customs clearance, which may include additional taxes such as GST in the buyer's country. If the seller is unaware of local tax obligations, this can reduce their profit margin.
• Using Sea Term for Multi-modal Shipment: Incoterms such as FOB, CIF, CFR, and FAS are specifically designed for inland water and sea transit. If you are using these Incoterms for land, air and rail routes, then this can create potential coverage gaps and legal ambiguity.
• Overlooking Cost or Risk Split in CPT and CFR: In CPT and CFR, the seller pays the freight charges to the destination, but the risk transfers to the buyer much earlier during transit. Many businesses mistakenly assume that risk and cost transfer occur at the same stage, which can lead to disputes in cases of cargo damage or loss.
• Confusing CIP and CIF Insurance Requirements: While both CIP and CIF include insurance coverage arranged by the seller, the levels of protection differ. CIP generally requires higher insurance coverage compared to CIF. Misunderstanding this difference may leave shipments underinsured.
• Using FOB for Containerised Shipments: FOB is often misused for containerised cargo shipments. Since containers are usually handed over at terminals before loading onto the vessel, FCA is generally considered a more suitable Incoterm for containerised transport.

Incoterms for international shipping are the standardised rules that provide a concrete framework for the buyers and sellers. They play a pivotal role in preventing misunderstandings and outlining each party’s rights and obligations..

Along with understanding Incoterms, businesses should also invest in a suitable marine insurance plan to protect their goods during transit. Whether shipments are transported through sea, air, road or inland waterways, marine cargo insurance provides financial protection against loss or damage caused during transportation.

It offers assurance to businesses in international and domestic trade by covering unexpected incidents such as accidents, theft and natural disasters. Not just this, marine cargo insurance allows businesses to run their operations smoothly by avoiding costly interruptions during transit.

Marine insurance in India caters to different business requirements and shipment values. TATA AIG is one such provider that offers customised SME solutions, such as marine insurance, freight insurance, etc., tailored to businesses' needs.

Our freight insurance plan helps in covering the loss of freight charges when cargo is damaged or not delivered. Secure your shipment with our cost-effective plan now!