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Incoterms

Iconterms
International trade operations originate from a purchase/sale contract between an importer and exporter, in which the clauses governing the said trade operation are stipulated.

The Incoterms (International Commercial Terms) can be considered a set of optional international rules which the International Chamber of Commerce has compiled and defined based on the more or less standardized practices of traders.

The Incoterms basically define to what extent the seller is responsible for the goods and the expenses to be borne by him and are therefore included in the price.

Selector Incoterms 2020

Functions

The functions of the Incoterms are basically to determine:

The distribution of the expenses. The seller knows exactly up to what point and place he must assume the expenses the sales contract entails and include them in the price. This enables the buyer to know exactly which expenses must be added to the price offered so as to compare them with other offers, both national and international.

Transmission of risk. The buyer knows exactly as from what place and time the risks incurred by the goods during shipment are to be borne by him. Therefore, the Incoterms define the time and place in which the seller's liability ends and the buyer's begins. This is of utmost importance to ensure the goods.

The place for delivery of the goods. The Incoterms indicate the specific place where the seller must deposit the goods and therefore the point where the buyer must collect them.

Classification

The International Chamber of Commerce has classified the Incoterms in line with the mode of transport used. Thus, the first group includes 7 Incoterms (EXW, FCA, CPT, CIP, DAP, DPU and DDP) which can be used regardless of the means of transport and if one or more means of transport are used. The second group contains 4 Incoterms (FAS, FOB, CFR and CIF) to be used when the goods are shipped between two ports.

Rules for any mode or modes of transport

This group includes the following Incoterms:

EXW – Ex Works
FCA – Free Carrier
CPT – Carriage Paid to
CIP – Carriage and Insurance Paid to
DAP – Delivered at Place
DPU – Delivered at Place Unloaded
DDP – Delivered Duty Paid

These Incoterms are to be used in shipments in which port-to-port ocean-going transport is not used; i.e. whenever the transport is by air or land (train or lorry). When more than one means of transport are used, this group is also used, even when a ship is one of the means of transport, probably the chief one. This is the case of container shipments, which will almost always form part of a combined freight, unless the container travels in a door-to-door shipment by lorry (which would also use an Incoterm of this group). Although a container travels from Bilbao to Bombay, the 5,822 nautical miles via Suez will probably entail several kilometres by lorry at each end.

EXW (En fábrica, Ex Works)

The seller fulfils his delivery obligation after making the goods to the buyer at the seller's own premises (factory, warehouse, etc.).

The seller is not responsible for loading the goods onto the transport supplied by the buyer nor for the export customs dispatch, unless otherwise agreed. The buyer bears all the costs and risks inherent to the transport of the goods from the seller's premises to the destination. This term represents the minimum obligation on the part of the seller.

This term should not be used when the buyer cannot carry out, directly or indirectly, the export formalities. Under such circumstances, the term FCA should be used.

It is suitable for domestic trade. In the case of international trade, FCA is more advisable.

Neither is it suitable when payment is intended to be by documentary credit. If used in documentary credit, no transport document should be required, as delivery to the carrier is not a seller's obligation.

FCA (Free Carrier)

The seller meets his obligations to deliver after delivering the goods, to the carrier nominated by the buyer at the agreed place once the export clearance carried out.

If the buyer does not indicate a specific delivery point, the seller can choose, within the place or area stipulated, where to make delivery to the carrier.

The term FCA may be used for all means of transport, including multimodal. FCA must always be used for ocean-going transport when delivery is not in the traditional form aboard the ship (at a loading terminal, train, containers or similar).

If the term FOB were used for these cases, the seller would assume the risks and costs until the goods are placed on board during a period over which he would have no control.

CPT (Carriage Paid To)

The seller pays the freight for transporting the goods to the agreed destination.

The risk of loss or damage to the goods together with any additional cost caused by events occurring after the date of delivery to the carrier are transferred from the seller to the buyer at the moment the goods are delivered into the carrier's custody. If the transport involves several carriers until the agreed point of destination, the risk is transferred when the goods have been delivered to the first carrier.

The term CPT requires the seller to clear the goods for export. The term may be used for all means of transport, including multimodal.

CIP (Carriage and Insurance Paid to)

The seller has the same obligations as under the CPT term, but he must take out a transport insurance policy against the buyer's risk of losses or damage to the goods during transport.

The seller takes out the policy and pays the premium. The seller must take out cargo insurance complying with the cover provided by Clauses (A) of the Institute Cargo Clauses (LMA/IUA) or any similar clauses. The insurance must cover, at a minimum, the price provided in the contract plus 10% (i.e. 110%).

CIP requires the seller to clear the goods for export. The term may be used for all means of transport, including multimodal.

DAP (Delivered At Place)

The seller has fulfilled his obligation to deliver the goods when they have been placed at the buyer's disposal at the agreed place at destination.

The seller must assume the risks and costs of placing the goods at the agreed point (excluding duties, taxes and any other official expense arising from the import in the country of destination). The buyer must bear any additional cost and assume the risks arising from lack of clearance in the country of import.

In general, this term is not suitable for documentary credits, as it should require a document attesting the delivery at destination, which would distort the documentary credit.

DPU (Delivered at Place Unloaded)

The seller has fulfilled his obligation to deliver the goods when they have been placed at the buyer's disposal at a named place of destination, unloaded, but without clearance for import.

The seller must assume all the costs and risks until the goods are delivered at the agreed place of destination (excluding duties, taxes and any other official expense arising from the import in the country of destination).

In general, this term is not suitable for documentary credits as it should require a document attesting the delivery at destination, which would distort the documentary credit.

DDP (Delivered Duty Paid)

The seller has fulfilled his obligation to deliver the goods when they have been placed at the buyer's disposal at the agreed place of destination. The seller must assume the risks and costs of placing the goods at the agreed point, including customs duties, taxes and delivery costs, cleared for import. While the term EXW represents the minimum obligation for the seller, the term DDP represents the maximum one.

This term must not be used if the seller cannot, directly or indirectly, obtain the import licence.

If the parties wish the buyer to pay the import duties, DAP must be used.

If the parties wish to exclude from the seller's obligations any of the import-related costs (such as VAT) this must be clearly stated (for example, "DDP, VAT unpaid").

In general, this term is not suitable for documentary credits, as it should require a document attesting the delivery at destination, which would distort the documentary credit.

Rules for maritime transport and inland waterways

This group includes the following Incoterms:

FAS – Free Alongside Ship
FOB – Free on Board
CFR – Cost and Freight
CIF – Cost, Insurance and Freight

These are the Incoterms to be used when the point of delivery and the place the goods are carried to are ports. Delivery to the carrier takes place on board or alongside the ship, so the seller must monitor the goods until that time.

When the goods are carried in containers, the seller usually places the goods in the hands of the carrier at a terminal and not on board or alongside the ship. In these circumstances FAS, FOB, CFR or CIF would be unsuitable and the Incoterms belonging to the group "Rules for any mode or modes of transport" stated above should be used instead: FCA instead of FAS or FOB; CPT instead of CFR, and CIP instead of CIF.

FAS (Free Alongside Ship)

The seller fulfils his obligation to deliver on placing the goods alongside the ship at the dock or the barges at the named port of shipment.

In this case, the buyer must bear all the costs and risks of loss or damage to the goods from that time. The term FAS can only be used for sea or inland waterway transport. The term FAS implies that the seller clears the goods for export.

When the goods are to travel in containers, the term FAS would be unsuitable and the term FCA should be used instead.

FOB (Free On Board)

The seller fulfils his obligation to deliver after placing the goods on board the vessel at the named port of shipment.

The seller must bear all the costs and risks of loss or damage to the goods from that time. The term FOB implies that the seller clears the goods for export. The term FOB can only be used for sea or inland waterway transport. When loading the goods onboard the ship serves no practical purposes to the aims discussed here, as is the case of roll-on/roll-off (where the cargo enters the ship inside a lorry or wagon) or container traffic, the term FCA is more appropriate.

CFR (Cost and Freight)

The seller must pay the costs and the freight necessary to place the goods at the port of destination, but it is the buyer who runs the risk of loss or damage to the goods, together with any additional cost arising from events occurring after placing the goods on board the vessel at the port of shipment.

The term CFR requires the seller to clear the goods for export. The term CFR can only be used for sea or inland waterway transport. When loading the goods onboard the ship serves no practical purposes to the aims discussed here, as is the case of roll-on/roll-off (where the cargo enters the ship inside a lorry or wagon) or container traffic, the term CPT is more appropriate.

CIF (Cost, Insurance and Freight)

The seller has the same obligations as under the term CFR, but he must obtain the maritime transport insurance against the risk incurred by the buyer of losses or damage to the goods during transport.

The seller takes out the insurance policy and pays the premium. The buyer must take into account that under the term CIF, the seller is required to obtain only limited insurance cover complying with Clauses (C) of the Institute Cargo Clauses (LMA/IUA) or any similar clauses. The insurance must cover, at a minimum, the price provided in the contract plus 10% (i.e. 110%).

The term CIF requires the seller to clear the goods for export. The term CIF can only be used for sea or inland waterway transport. When loading the goods onboard the ship serves no practical purposes to the aims discussed here, as is the case of roll-on/roll-off (where the cargo enters the ship inside a lorry or wagon) or container traffic, the term CIP is more appropriate.

Reference to the Incoterms

The parties who wish to use the Incoterms 2020 must specify this in their contracts.

Recommendations

  1. Always include the expression "Incoterms 2020" following the Incoterm. For example: "CIF Istanbul (Incoterms 2020)".
  2. Use only the 11 Incoterms in effect in their three-letter form, followed by the agreed point or delivery port.
  3. Give precise instructions to the carrier regarding the Incoterm used so as to ensure that the transport contract matches the purchase/sale contract.
  4. The Incoterms FAS, FOB, CFR and CIF must be used solely for traditional maritime transport (goods loaded on board a ship).
  5. For containers, multimodal and general cargo, use the Incoterms EXW, FCA, CPT, CIP, DAP and DDP.
  6. 6. The C rules (CIF, CFR, CIP and CPT) are not contracts of arrival or delivery at destination but shipment contracts. Delivery occurs in origin, as in the F rules.
  7. 7. Remember that additional specifications may be necessary with regard to:
  • When delivery will take place and who must carry out the loading and unloading.
  • Insurance cover and its term and geographic scope.
  • Limitations with regard to the transport (refrigerated containers, prohibition to stow goods on deck...).
  • Force majeure clauses, exemption clauses or term extension clauses, especially when the party is responsible for customs clearance or for delivery at a point located inland.
  1. 8. Consult the publication Incoterms® 2020 of the International Chamber of Commerce.
 

Incoterms 2010

Chart

Incoterms 2010 Simulator

Functions

The functions of the Incoterms are basically to determine:

The distribution of the expenses. The seller knows exactly up to what point and place he must assume the expenses the sales contract entails and include them in the price. This enables the buyer to know exactly which expenses must be added to the price offered so as to compare them with other offers, both national and international.

Transmission of risk. The buyer knows exactly as from what place and time the risks incurred by the goods during shipment are to be borne by him. Therefore, the Incoterms define the time and place in which the seller's liability ends and the buyer's begins. This is of utmost importance to ensure the goods.

The place for delivery of the goods. The Incoterms indicate the specific place where the seller must deposit the goods and therefore the point where the buyer must collect them.

Terms

The International Chamber of Commerce has classified the Incoterms in line with the form of transport used. Thus, the first group includes 7 Incoterms (EXW, FCA, CPT, CIP, DAT, DAP and DDP) which can be used regardless of the means of transport and if one or more means of transport are used. The second group contains 4 Incoterms (FAS, FOB, CFR and CIF) to be used when the goods are shipped between two ports.

RULES FOR ANY FORM OR FORMS OF TRANSPORT

This group includes the following Incoterms:

EXW – Ex Works
FCA – Free Carrier
CPT – Carriage Paid to
CIP – Carriage and Insurance Paid to
DAT – Delivered at Terminal
DAP – Delivered at Place
DDP – Delivered Duty Paid

These are the Incoterms to be used in those shipments in which port-to-port ocean-going transport is not used; i.e. whenever the transport is by air or land (train or lorry). When more than one means of transport are used, this is also the suitable group, even when a ship is one of the means of transport, probably the chief one. In the case of container shipments, which will almost always form part of a combined freight, unless the container travels in a door-to-door shipment by lorry (which would also use an Incoterm of this group). Although a container travels from Bilbao to Bombay, the 5,822 nautical miles via Suez will probably entail several kilometres by lorry at each end. 

EXV (Ex- Works)

The seller fulfils his delivery obligation after placing the goods at his own premises (factory, warehouse, etc.) at the disposal of the buyer.

He is not responsible for loading the goods onto the transport used by the buyer nor the export customs duty, unless otherwise agreed. The buyer bears all the costs and risks inherent to the transport of the goods from the seller's premises to the destination. This term represents the minimum obligation on the part of the seller.

This term should not be used when the buyer cannot carry out, directly or indirectly, the export formalities. Under such circumstances, the term FCA should be used.

It is suitable for domestic trade. In the case of international trade, FCA is more advisable.

Neither is it suitable when payment is by documentary credit. If used in documentary credit, no transport document should be required, as delivery to the forwarder is not the seller's obligation.

FCA (Free Carrier)

The seller meets his obligations to deliver after delivering the goods and carrying out the export clearance, to the forwarder designated by the seller at the agreed place.

If the seller does not indicate a specific delivery point, the seller can choose, within the place or area stipulated, where to make delivery to the forwarder. When, in keeping with commercial practice, the seller's assistance is necessary to carry out the contract with the forwarder (in cases such as freight by train or airplane), the seller may do so on account and at the risk of the buyer. The term FCA may be used for all means of transport, including multimodal.

The term FCA must be used for ocean-going transport in every case in which delivery is not in the traditional form aboard the ship (at a loading terminal, train, containers or similar). If the term FOB were used for these cases, the seller would assume the risks and costs until the goods are placed on board during a period over which he would have no control.

CPT - (Carriage Paid To)

The seller pays the freight for transporting the goods to the agreed destination.

The risk of loss or damage to the goods together with any additional cost due to events occurring subsequent to the date of delivery to the forwarder, are transferred from the seller to the buyer at the moment the goods are delivered into the forwarder's custody. If the transport involves several forwarders until the agreed point of destination, the risk is transferred at the time the goods have been delivered to the first forwarder.

The term CPT requires the seller clear the goods for export. The term may be used for all means of transport, including multimodal.

CIP (Carriage And Insurance Paid To)

The seller has the same obligations as under the term CPT and in addition he must obtain the transport insurance against the risk incurred by the buyer of losses or damage to the goods during transport.

The seller effects insurance and pays the premium. The buyer must take into account that under the term CIP, the seller is obliged to obtain only minimum insurance cover (110%) and issue it in a negotiable manner for the buyer and in the currency of the contract.

The term CIP requires the seller clear the goods for export. The term may be used for all means of transport, including multimodal.

DAT (Delivered At Terminal)

The seller has fulfilled his obligation to deliver the goods when they have been placed at the buyer's disposal at a port terminal or agreed destination, offloaded and without clearance for import.

Terminal includes any place, covered or otherwise, such as a dock, container warehouse or road, rail or air terminal which must always be specified as clearly as possible.

The seller must assume all the costs and risks until the goods are delivered to the destination. If the seller is also to assume the costs and risks from the terminal to another place, the terms DAP or DDP should be used.

In general, this term is not suitable for documentary credit as a document would be required proving delivery to destination, which would distort the documentary credit.

DAP (Delivered At Place)

The seller has fulfilled his obligation to deliver the goods when they have been placed at the buyer's disposal at the agreed place at destination.

The seller must assume the risks and costs of placing the goods at the agreed point (excluding duties, taxes and any other official expense arising from the import in the country of destination). The buyer must bear any additional cost and assume the risks arising from lack of clearance in the country of import. If the parties wish the seller to carry out the customs formalities and assume the resulting risks and costs, precise instructions to this effect must be added to the term DAP. If the parties wish to add to the seller's obligations any of the import-related costs (such as VAT) this must be clearly stated (for example, "DAP", VAT paid").

In general, this term is not suitable for documentary credit as a document would be required proving delivery to destination, which would distort the documentary credit.

DDP (Delivered Duty Paid)

The seller has fulfilled his obligation to deliver the goods when they have been placed at the buyer's disposal at the agreed place at destination. The seller must assume the risks and costs of placing the goods at the agreed point including customs duties, taxes and delivery costs, cleared for import. While the term EXW represents the minimum obligation for the seller, the term DDP represents the maximum.

This term must not be used if the seller cannot directly or indirectly obtain the import licence.

If the parties wish the buyer pay the import duties, the term DAP must be used.

If the parties wish to exclude from the seller's obligations any of the import-related costs (such as VAT) this must be clearly stated (for example, "DAP", VAT unpaid").

In general, this term is not suitable for documentary credit as a document would be required proving delivery to destination, which would distort the documentary credit.
 

RULES FOR MARITIME TRANSPORT AND INLAND WATERWAYS

This group includes the following Incoterms:

FAS – Free Alongside Ship
FOB – Free on Board
CFR – Cost And Freight
CIF – Cost, Insurance and Freight

These are the Incoterms to be used when the point of delivery and the place the goods are carried to are ports. Delivery to the forwarder takes place on board or alongside the ship, so the seller must monitor the goods until that time.

When the goods are carried in containers, the seller usually places the goods in the hands of the forwarder at a terminal and not on board or alongside the ship. In these circumstances FAS, FOB, CFR or CIF would be unsuitable and the Rules group of the Incoterms must be used for any means of transport: FCA instead of FAS or FOB; CPT instead of CFR, and CIP instead of CIF.

FAS (Free Alongside Ship)

The seller fulfils his obligation to deliver after placing the goods alongside the ship at the dock or the barges at the designated lading point.

In this case, the seller must bear all the costs and risks of loss or damage to the goods as from that time. The term FAS can only be used for maritime or inland waterway shipping. The term FAS implies that the seller clears the goods for export.

When the goods are in containers, the term FAS would be unsuitable and the term FCA should be used.

FOB (Free On Board)

The seller fulfils his obligation to deliver after placing the goods onboard at the designated lading point.

The seller must bear all the costs and risks of loss or damage to the goods as from that time. The term FOB implies that the seller clears the goods for export. The term FOB can only be used for maritime or inland waterway shipping. When clearing the side of the ship serves no practical purposes as is the case of roll-on/roll-off (the cargo enters the ship inside a lorry or wagon) or container traffic, the term FCA is the most appropriate.

CFR (Cost And Freight)

The seller must pay the costs and the freight necessary to place the goods at the port of destination, but it is the buyer who runs the risk of loss or damage to the goods together with any additional cost arising due to events occurring subsequent to placing the goods onboard at the port of embarkation.

The term CFR requires the seller clear the goods for export. The term CFR can only be used for maritime or inland waterway shipping. When clearing the side of the ship serves no practical purposes as is the case of roll-on/roll-off (the cargo enters the ship inside a lorry or wagon) or container traffic, the term CPT is the most appropriate.

CIF (Cost, Insurance and Freight)

The seller has the same obligations as under the term CFR and in addition he must obtain the maritime transport insurance against the risk incurred by the buyer of losses or damage to the goods during transport.

The seller effects insurance and pays the premium. The buyer must take into account that under the term CIP, the seller is obliged to obtain only minimum insurance cover (110%) and issue it in a negotiable manner for the buyer and in the currency of the contract.

The term CIF requires the seller clear the goods for export. The term CIF can only be used for maritime or inland waterway shipping. When clearing the side of the ship serves no practical purposes as is the case of roll-on/roll-off (the cargo enters the ship inside a lorry or wagon) or container traffic, the term CIP is the most appropriate.

THE C INCOTERMS C (CHIEF FREIGHT PAID): CFR, CIF, CPT, CIP

The seller must contract the transport but without assuming the risk of loss or damage to the goods or any other additional cost arising after embarkation and clearance. The terms CIF and CIP imply that the seller must effect the transport insurance.

It should be noted that the C terms are identical to the F terms as far as performance of the contract is concerned. In both cases, the seller fulfils the contract in the country of embarkation or clearance for export. Therefore, the C terms refer to embarkation contracts as do the F terms, and not to arrival at destination contracts, which are exclusively D terms. Although it is the seller who contracts the transport and insurance, if applicable (CIF and CIP), the risks of loss or damage to the goods and any other additional expense subsequent to embarkation are on account of the buyer.

The C terms differ from the rest in that the division of the costs does not match the division of the risks; the latter end at the time of lading and the former upon offloading, as far as the transport is concerned (except additional costs arising from events subsequent to dispatch and which would fall to the buyer, as the seller risk finalises at the time of embarkation). Therefore, precaution is required to add obligations to the seller which go beyond the point of risk transfer.

As regards unstowing and offloading costs (for the maritime terms, CIF and CFR), it should be borne in mind that these are generally covered by the freight when the goods are carried on liner terms. However, the transport contract may exclude one or both of these operations, which should be agreed in the purchase/sale contract (a mere reference to an Incoterm is insufficient).

Unless otherwise agreed, the maritime transport document (in the terms CIF and CFR) must enable the buyer to sell the goods in transit by transferring the lading document to a second buyer. Therefore, the transport document must be a negotiable bill and a full set must be submitted to the buyer.

THE D INCOTERMS AND DOCUMENTARY CREDIT

The D terms (DAT, DAP and DDP) are not appropriate for documentary credit. To adjust the payment obligation in the documentary credit with the payment obligation in a purchase/sale contract, the documentary credit must include a document evidencing delivery at destination of the goods, which would make the function of a documentary credit unnecessary.

REFERENCE TO THE INCOTERMS

The parties who wish to use the Incoterms 2010 must specify this in the contracts.

Reference to the incoterms

  1. Always include the expression "Incoterms 2010" following the Incoterm. For example: "CIF Istanbul (Incoterms 2010)".
     
  2. Use only the 11 Incoterms in effect in their three-letter form, followed by the point or delivery port agreed.
  3. Give precise instructions to the forwarder with regard to the Incoterm used so as to ensure that the transport contract matches the purchase/sale contract.
  4. The Incoterms FAS, FOB, CFR and CIF must be used solely for traditional maritime transport (goods loaded onboard a ship).
  5. For containers, multimodal and general cargo, use the Incoterms EXW, FCA, CPT, CIP, DAT, DAP and DDP.
  6. The Incoterms C (CIF, CFR, CIP and CPT) are not contracts for arrival or delivery at destination but embarkation contracts. Delivery occurs at source, as with the F group.
  7. Remember that additional specifications may be necessary with regard to:

    - When delivery takes place and who must load and offload.
    - Insurance cover and its time and geographic scope.
    - Limitations with regard to the transport (refrigerated containers, prohibition to stow goods on deck...).
    - Force majeure clauses, exemption clauses or time extension clauses, especially when responsible for customs clearance or delivery at a point located inland.
     
  8. Consult the publication Incoterms® 2010 of the International Chamber of Commerce.
     
  9. Sell CIF and Buy FOB
       

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