international commercial terms of sale

Have you heard of Incoterms? Are you familiar enough with their meanings to use in your sales contract negotiations? If your answer to theses questions is "NO!", then this page is for you.

We are talking about three letter terms representing a standard set of rules that are recognized internationally for usage in business sales; not applicable domestically nor for household goods, personal effects, or gifts.

Specifically, these terms spell out:

  1. Delivery:  the moment in which risk of loss or damage transfers from the seller to the buyer
  2. Carriage Cost:  which party, seller or buyer, is obligated to pay transportation costs, and to which point or place
  3. Insurance:  if required, and which party is obligated to obtain cargo insurance

What Incoterms® 2010 Rule is right for me?

Are you the buyer or the seller? Different terms of sale seem to favor one party over the other, so use the tips below to negotiate your sales contract to the desired agreement

Tip #1:  Determine the transfer of risk first. This is the delivery point or place.

Suppose the airline loses the shipment. Suppose a few boxes are crushed by a forklift. Who bears this risk? Is the seller required to re-ship at no cost to the buyer? Or is the buyer required to place a new purchase order?

Consider these terms if you are a seller looking to minimize your risk of re-shipping for free:

FCA (Seller's risk ends at pickup)

CPT (Seller's risk ends at pickup)

CIP (Seller's risk ends at pickup)

Or, for Sea freight:

FAS (Seller's risk ends along vessel at origin port)

CFR (Seller's risk ends when on the boat)

CIF (Seller's risk ends when on the boat)

Consider these terms if you are a buyer looking to minimize your risk of re-ordering:

DAT (Buyer's risk begins at buyer's named terminal)

DAP (Buyer's risk begins on arrival at buyer's named place)

or, a "C-term" with Insurance:

CIP (Buyer's risk begins at pickup; buyer's insurance obtained by Seller)

CIF (Buyer's risk begins at pickup; buyer's insurance obtained by Seller)

Note that whatever place follows the Incoterm (ie: CIP Birmingham Airport, UK) does not mean that the Birmingham Airport is the delivery point; does not mean that the Birmingham Airport is the place where risk transfers from seller to buyer.

You might notice that I did not include EXW , FOB, or DDP in the lists above. More info on these later, but just quickly note that these should be reserved for unique situations are not recomended.

Tip #2: Let the seller choose the forwarder; let the buyer choose the carrier

Carriage cost is where most buyers and sellers get hung up. They ignore the issue of risk (the delivery point) and instead focus on who is paying the freight costs.

But consider!

If the seller pays the carriage, the seller will usually just include transportation on the seller's invoice to the buyer, thus passing the cost on to the buyer (and often with a mark-up).

We recommend letting the seller nominate a freight forwarder of their preference (any term other than EXW), but letting the buyer nominate a carrier of their preference. This allows export Customs clearance to be handled properly by the seller's forwarder who is, most likely, domiciled in the same country as the seller and more familiar with the selling country's export laws.

Depending on the risk preferences above, consider the following:

FCA (Seller nominates forwarder; pays carriage to named place, seller's country)

CPT (Seller nominates forwarder; pays carriage to named place, buyer's country)

CIP (Seller nominates forwarder; pays carriage to named place, buyer's country)

or, for Sea freight:

FAS (Seller nominates forwarder to origin port; buyer's forwarder/carrier takes over)

CFR (Seller nominates forwarder; pays carriage to named port, buyer's country)

CIF (Seller nominates forwarder; pays carriage to named port, buyer's country)

Tip #3 Insure your risk

That is insure with an "I" not an "E." Regardless of the Incoterm selected, be sure to obtain cargo insurance to cover any portion of the shipment that you bear risk on and any portion you pay carriage cost on. Any Incoterm with an "I" in it places the onus of cargo insurance on the seller, but even if insurance is not required by the terms of sale, we recommend it anyway. It allows the seller to quickly re-ship or the buyer to re-purchase a lost or damaged product. Damage and loss happens, so protect yourself!

What about EXW, FOB and DDP? 

We call for these terms of sale on special occasion, but too frequently we see them used commonly an inappropriately. We hope to give you a quick run-down:

A few things to note about EXW:

  1. Exposes the seller to export compliance violations
  2. Requires the buyer to understand and obtain export licenses from originating country
  3. Requires the buyer to properly classify and report export Census information
  4. Is still an export and does not exempt the seller from requirements under US law
  5. Represents maximum risk to the buyer. If the product is damaged while loading at the seller's facility, the buyer has to re-purchase the damaged goods
  6. If the buyer is unable to properly export the product from the country, the seller does not have to offer any refund
  7. The buyer will likely be unable to obtain any cargo insurance to cover loss or damage
  8. Works well for "deemed exports"
  9. Works well for shipments between related companies

A few things to note about DDP:

  1. Exposes the seller and buyer to higher import duty and taxes. Requires the seller to properly classify goods in a foreign country (which they usually do not)
  2. Usually requires the seller to be registered to do business in a foreign country (which they usually are not)
  3. Negates possible duty refund/rebate to the buyer (which a foreign company cannot usually obtain).
  4. Exposes the seller to maximum riskAny theft in the buyer's country requires the seller to re-ship at no cost to the buyer
  5. Government corruption is a reality. Shady business dealings to foreign officials can land a seller in prison and penalties.
  6. Abandoned cargo charges can be assessed back to origin on the seller
  7. Works well for trade shows, exhibitions
  8. Works well for shipments between related companies

A couple of things to note about FOB:

  1. Do not use for air or truck international shipments. FOB has unique meaning in North American countries that has nothing to do with international shipping. Specifically "FOB ORIGIN" and "FOB DESTINATION" are not useful internationally.
  2. FOB has limited usage (think break-bulk, ro/ro). If your product is going into a container, do not use FOB.
  3. If your invoice template has an FOB field as a default cell, please white it out unless you are really shipping FOB.