Incoterms™ - An Introduction

Disclaimer: The following information is intended as only an introduction to the topic and should not be used as the sole source for determining contractual Incoterms™. The topic of Incoterms™ and the explanation of terms presented below has been summarized. As such, a full understanding of the topic will require researching additional information. Additional information is available from the International Chamber of Commerce Publication ICC Guide to Incoterms™ 2000 and the ICC official rules, Incoterms™ 2000.  It is recommended that you obtain legal council before negotiating any contractual terms.

The feasibility of any transaction (profit) requires exporters and importers to understand the costs and risks associated with any international transaction: responsibility for shipping costs, purchasing insurance, customs clearance and duties, etc. If something should go wrong during transportation (risk), who has title to the goods? What obligations did each of the parties agree to? These issues will matter greatly!

Incoterms™ are internationally accepted commercial trade terms which determine the passing of risk and the passing of costs under an international contract of sale. The terms tell each party to the contract what their obligations are for the carriage of goods from the seller to the buyer, for insurance and for export and import clearances. In addition, should a dispute arise, Incoterms™ are the only international trade terms recognized in a court of law. It is strongly recommended that express reference is made in the contract using the words "Incoterms 2000" to avoid confusion with any previous version of Incoterms™.

There are 13 Incoterms™ and they are divided into four major groups: "E", "F", "C" and "D" terms. The first letter is an indication of the group to which the term belongs. Each group means additional responsibilities and costs for the exporter. For example, the most commonly used terms under each of these groups are: Ex Works (EXW), Free Alongside Ship (FAS), Free On Board (FOB), Cost and Freight (CFR), Cost, Insurance and Freight (CIF), and Delivered Duty Paid (DDP).

NOTE: Incoterms™ have precise responsibilities for transaction costs and risks, and many other Incoterms™ 2000 exist. Please obtain additional information (http://www.iccwbo.org/index_incoterms.asp , "Guide to Incoterms^TM 2000 and Incoterms 2000" the official fules) and professional assistance before using any terms in international negotiations. Warning, the following common Incoterms™ 2000 descriptions have been summarized and are not to be used without professional assistance.

If the parties do not intend to deliver goods across a ships rail, other Incoterms™ 2000 should be used. For example, FCA, Free Carrier is preferable to FOB. Free Carrier obligates the seller to clear the goods for export and to deliver to a carrier named by the buyer to a named location. The buyer is responsible for unloading and all other costs and risks. Note even though Incoterms™ 2000 improves ease of understanding, you will still find many transactions within North America still operate with FOB pricing terminology. For example, FOB Las Vegas even though such a place has no marine port. It is advisable to research other terms which remove the notion of crossing a ships rail such as CPT, Carrier Paid To and CIP, Carrier and Insurance Paid To.

Prepared by: Canada/Manitoba Business Service Centre