Incoterms
The Incoterms (International Commercial Terms) are internationally recognized rules established by the International Chamber of Commerce (ICC) that clearly define the responsibilities, costs, and risks between the buyer and the seller in an international trade transaction.
In essence, Incoterms address three key questions in an international sales transaction:
- Who bears the costs? (freight, insurance, customs duties, etc.)
- Who bears the risks? (loss of or damage to the goods during transportation)
- Where are the goods delivered? (the exact delivery point in the country of origin or destination)
Classification of Incoterms 2020 (Current Version)
They are divided into two groups according to the mode of transport:
For any mode of transport (multimodal):
- EXW (Ex Works): The seller makes the goods available at its premises, such as a factory or warehouse. The buyer assumes almost all costs and risks from that point onward.
- FCA (Free Carrier): The seller delivers the goods to the carrier at an agreed location. From that point, the risk is transferred to the buyer.
- CPT (Carriage Paid To): The seller pays the transportation costs up to an agreed destination, but the risk is transferred to the buyer once the goods have been handed over to the carrier.
- CIP (Carriage and Insurance Paid To): Similar to CPT, but the seller is also required to arrange insurance coverage for the goods.
- DAP (Delivered at Place): The seller delivers the goods to the agreed destination, ready for unloading.
- DPU (Delivered at Place Unloaded): The seller delivers the goods unloaded at the agreed destination.
- DDP (Delivered Duty Paid): The seller assumes all costs and risks, including customs clearance, duties, and taxes at destination.
For Sea and Inland Waterway Transport:
- FAS (Free Alongside Ship): The seller delivers the goods alongside the vessel at the port of origin.
- FOB (Free On Board): The seller delivers the goods on board the vessel at the port of origin. From that point onward, the risk is transferred to the buyer.
- CFR (Cost and Freight): The seller pays the freight costs to the port of destination, but the risk is transferred to the buyer at the port of origin once the goods are loaded on board the vessel.
- CIF (Cost, Insurance and Freight): Similar to CFR, but the seller is also required to arrange minimum insurance coverage for the goods.
📌 Importance of Incoterms
- They help prevent misunderstandings in international contracts.
- They clearly define responsibilities related to transportation and insurance.
- They make it easier to calculate the actual costs of the transaction.
- They provide greater legal certainty through internationally standardized rules.
In international trade, Incoterms clearly define the obligations of buyers and sellers regarding costs, risks, and delivery of goods. However, between these two parties there is a key facilitator: the freight forwarder. Their role goes beyond coordinating shipments; it also involves ensuring that operations are carried out in accordance with the agreed Incoterm and that the interests of each party are properly safeguarded.
The Role of the Freight Forwarder in the Application of Incoterms
The freight forwarder acts as a logistics intermediary between the exporter, importer, carriers, and customs authorities. Their responsibility is not to modify the terms of the Incoterms — since these are agreed upon by the buyer and seller — but rather to execute and supervise the logistics operation in accordance with the terms established in the international sales contract.
Some of their key responsibilities include:
- Operational interpretation of the Incoterm: advising the client on the actual scope of their obligations, costs, and risks.
- Logistics coordination: arranging transportation, cargo consolidation, insurance, and delivery in accordance with the defined point of risk transfer.
- Documentation compliance: ensuring that invoices, bills of lading, certificates, and other required documents correctly reflect the agreed Incoterm.
- Risk management: anticipating potential contingencies such as delays, damage, or additional costs, and advising the client on appropriate insurance coverage when required or recommended under the applicable Incoterm.
- Neutral facilitator: maintaining transparency between buyer and seller while respecting the responsibilities of each party.
Shared Responsibility and the Freight Forwarder’s Limitations
Although freight forwarders assume a high level of responsibility in the execution of logistics operations, it is essential to clarify that they do not replace the contractual obligations of the buyer or the seller.For example:
- Under FOBthe exporter is responsible for delivering the cargo on board the vessel. The freight forwarder coordinates the shipment and issues the transport document, but the primary responsibility remains with the seller.
- Under CIFthe seller is required to arrange minimum insurance coverage. The freight forwarder may assist in arranging the insurance policy, but is not responsible for omissions by the exporter if such coverage is not expressly requested.
- Under DAP or DDPthe freight forwarder becomes a key operational partner in ensuring that customs procedures and final delivery are completed smoothly; however, the applicable costs and contractual obligations remain the responsibility of the seller.
The Freight Forwarder’s Added Value in Incoterms Transactions
More than an operational service provider, the international freight forwarder acts as a strategic logistics advisor.Their expertise helps importers and exporters to:
- Select the most appropriate Incoterm according to the type of cargo, destination country, and transportation risks.
- Reduce hidden costs resulting from the incorrect interpretation of responsibilities.
- Improve traceability and visibility throughout the logistics and supply chain process.