What are INCOTERMS® 2010?

New to INCOTERMS®? Then spend some time reading through this guide to INCOTERMS® 2010. If you ship globally you’ll need to know these shipping terms when communication with your International customer or supplier.

Shipping Terms

Shipping terms typically address at which point in time the responsibilities and liabilities related to the shipping of the goods transfer from the seller to the buyer.

Using shipping terms, the seller and buyer explicitly agree on:

  • the place and time of delivery of the goods,
  • whether buyer or seller is liable for goods damaged or lost in transit
  • whether seller will pay for the insurance covering the goods.

they resort to using commonly understood shipping terms. You may have heard of Ex-Works or FOB?

Terms not addressed by Shipping Terms: Insurance, Change of Ownership Title, Payment and Freight Method

Only when using CIF and CFR does INCOTERMS® 2010 address the issue of insurance. In these cases the seller is responsible for, and pays for insuring the goods. Because none of the other terms address insurance, buyer and seller must address the issue in the sales contract.

Similarly, the issue of title transfer is not addressed by INCOTERMS® 2010. We suggest that the salescontract states that title transfers only when the contract has been satisfied: the goods have been delivered and the customer has paid.

Payments are not covered by shipping terms either. You must agree separate payment terms with your trade partner in the sales contract. It makes sense to align the payment terms with the shipping terms.

Even though certain shipping terms are only used in Maritime shipment, the actual Freight method is not explicitly called out by the shipping terms. If you plan to ship the goods by truck, train or by air, you should say so in the sales contract.

International Shipping Terms

As a business person you have shipped and received many goods, and you have probably seen and become familiar to some of these terms. What you may not realize is that some of the terms you’ve grown accustomed to do not have the same legal meaning all over the world. While that is not a problem domestically, every court within your domestic jurisdiction understand the local terms equally, this is not necessarily the case Internationally.

To avoid confusion, the International Chamber of Commerce (ICC) developed a set of shipping terms that International buyers and sellers can refer to. There terms are called INCOTERMS®. INCOTERMS® 2010 are the version of these terms that have been approved in 2010. Whenever you communicate your shipping terms using these terms, your trade partner and jurisdictions worldwide will understand exactly what these terms imply. Using INCOTERMS® is the perfect way to communicate shipping terms with your International partner. Because there are several versions of INCOTERMS® you should mention which version you refer to. Referring explicitly to INCOTERMS® 2010 means that you refer to the terms that are defined in the 2010 version, currently the latest reiteration of the terms.

Terms not addressed by Shipping Terms: Insurance, Change of Ownership Title

Only when using CIF and CFR does INCOTERMS® 2010 address the issue of insurance. In these cases the seller is responsible for, and pays for insuring the goods. Because none of the other terms address insurance, buyer and seller must address the issue in the sales contract.

Similarly, the issue of title transfer is not addressed by INCOTERMS® 2010. It makes sense to write in the sales contract that title transfers only when the contract has been satisfied: the goods have been delivered and the customer has paid.

FOB as used in North America, vs. FOB INCOTERMS®.

The term FOB, Free on Board, is widely used for domestic shipping within the US and Canada, and have a well understood meaning in US and Canadian commercial law. The term can be used as FOB “origin” or FOB “destination”. For instance if the factory of the seller is located in Santa Ana, CA and the warehouse of the buyer is in Orlando, FL:

  • FOB Los Angeles, CA means that the liability for the goods transfers when the goods are safely loaded onto the carrier at the factory dock. The buyer will have to pay for shipping and liability during transport.
  • FOB New York, NY means that the liability for the goods transfers when the goods are unloaded from the carrier at the destination point. The seller pays for shipping and is liable for loss or damage during transport.

FOB INCOTERMS® 2010, however is used only with shipments of goods using waterways. The term Free On Board when used in this context refers to the seller making the goods available for loading onto a ship in a specific port. The shipper is responsible for getting the goods to the port, and loaded onto the vessel. The buyer will then pay for the maritime transportation costs, the unloading, the duties, and transportation on from the receiving port to the buyer’s warehouse.

While a manufacturer might say that the price they quoted is FOB, Long Beach or FOB Los Angeles, you can imagine the confusing that might arise. A foreign customer could easily interpret that as FOB per INCOTERMS®, while that is not what you meant at all.
Clarity helps you and your trade partner clearly understand the meaning of your terms. When dealing with international trade always use INCOTERMS and state that appropriately.  For instance, FOB Los Angeles, CA INCOTERMS® 2010.

INCOTERMS® 2010 Reference Chart

The reference chart shows the INCOTERMS® 2010 as defined by the Chamber, simplified, interpreted and visualized by the GB5D team. Double-click on the image to enlarge the chart.

 

A full version of INCOTERMS® 2010 rules can be purchased from the International Chamber of Commerce.

Here you can learn more about FOB, shipping point and FCA, shipping point INCOTERMS® 2010

INCOTERMS® IS A REGISTERED TRADEMARK OF THE INTERNATIONAL CHAMBER OF COMMERCE.

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