Terms of Delivery / Shipment Terms

When buying from or selling to customers or suppliers, it is critical that both parties know, accept and understand the terms of delivery (or shipment terms).  To help avoid misunderstandings, the International Chamber of Commerce has developed a set of terms called Incoterms. The first Incoterms were published by the ICC in 1936. The stated purpose of developing standard shipping terms included simplifying and facilitating international trade, standardizing terminology, and creating a set of rules for the interpretation of shipping terms used in international trade. The result was a clearer understanding of the rights and duties of the parties to an international sale relating to the delivery of goods.

Incoterms were created to identify both the seller and the buyer's agreements relating to dividing or sharing risks and costs associated with product shipments.  However, it is important to remember that Incoterms do not inclide all of the terms and conditions necessary to create an agreement for the sale of goods.  For example, Incoterms do not address issues including method of payment, price, where title transfers, or remedies in the event of a breach of contract. 

Incoterms determines at what point risk of loss or damage to goods shifts from the seller to the buyer.  Incoterms identifies the responsibilities of the buyer, the seller and the carrier(s).  It also explains or codifies at what point the responsibility for customs and transportation expenses shifts from the seller to the buyer.  Incoterms do not:

• Address when or where title passes
• Address payment terms
• Address breach of contract related issued between seller and buyer

The following are brief descriptions of the more common terms of delivery, including a description of the obligations of the seller and buyer - or shipper and recipient.

EXW (Ex Works...named place)

The term EXW means that the seller fulfills their obligation to deliver when it has made the goods available to the buyer at the named place of delivery --- usually at the seller's premises.  The goods are normally packaged, but the seller is not responsible for loading the goods on the vehicle or for clearing the goods for export, unless otherwise agreed. The buyer bears all costs and risks involved in taking the goods from the seller's premises to their intended destination. Title and risk pass to the buyer at the seller's door.

FCA (Free Carrier...at the Named Point)

The term FCA has been designed to meet the requirements of modern transport particularly such multi-modal transportation devices as container or roll-on/roll-off traffic trailers and ferries. Title and risk pass to the buyer when the seller delivers goods that are cleared for export to the common carrier.  The seller fulfills its obligations when it delivers the goods into the custody of the carrier at the named point. If no precise point can be specified at the time of the contract of sale, the parties should refer to the place or range where the carrier should take the goods into his or her charge. The risk of loss or damage to the goods is transferred from the seller to the buyer at that time the carrier takes possession of the goods meaning at the point of delivery.

FAS (Free Along Side Ship...named port of shipment)

The term FAS means that the seller fulfills its obligation to deliver when the goods have been placed alongside the vessel on the dock or quay at the named port of shipment. Title passes from seller to buyer and the buyer bears all costs and risks of loss or damage to the goods from that moment forward. FAS term requires the buyer to clear the goods for export.

FOB (Free on Board...named port of shipment)

The term FOB is a transportation term that relates to the fact that the invoice purchase price includes delivery at the seller's expense to the carrier at a specified point.  For example, the term may be FOB seller's factory meaning the invoice purchase price includes nothing more than the buyer making the goods available at their place of manufacture for pick up.  Another common FOB point is FOB place of destination meaning that the seller agrees to deliver the merchandise to the buyer. 

FOB terms often means the goods are placed on board a ship by the seller at a port of shipment named in the sales contract. The risk of loss of or damage to the goods is transferred from the seller to the buyer as soon as or only when the goods pass over the ship's rail. The buyer pays all costs from that point forward, including freight and insurance. All risks from that point are borne by the buyer.  Generally, title to the goods passes from seller to buyer at the FOB point.

C&F or CFR (Cost & Freight…named point of destination)

The term C&F means that the seller must pay the costs and freight necessary to bring the goods to the named destination. However, the risk of loss of or damage to the goods as well as any cost increases is transferred from the seller to the buyer when the goods pass the ship's rail in the port of shipment. This term can only be used for sea and inland waterway. When the term "ship's rail" does not apply, such as with roll-on/roll-off traffic, then the term CPT is more appropriate. For air shipments, the term CPT should be used. However, in letter-of-credit usage, the C&F term is typically used for both sea and air shipments.

CIF (Cost, Insurance and Freight...named port of destination)

This is another international shipping term.  It defines which party pays the fees when goods are transported by sea.  Under CIF terms, the seller owns the goods until they are loaded on the vessel.  The selling price includes transportation costs to the vessel in addition to the cost of ocean marine insurance. The term CIF is basically the same as C&F but with the addition that the seller has to purchase marine insurance against the risk of loss or damage to the goods in transit.  Title and risk pass to the buyer when delivered aboard the ship by the seller. This term can only be used for sea and inland waterway. When the term "ship's rail" does not apply, such as with roll-on/roll-off traffic, then the term CIP is more appropriate. For air shipments, strictly speaking, the term CIP should be used. However, in letter of credit usage, the CIF term is typically used for both sea and air shipments.

CPT (Freight Carriage Paid To...named place of destination)

CPT means that the seller pays the freight costs to deliver goods to the named destination. However, the risk of loss or damage to goods in transit, as well as of any cost increases is transferred from the seller to the buyer when the goods, appropriately packaged, have been delivered to the custody of the first carrier and not at the ship's rail. This is also where title passes.  CPT can be used for all modes of transport including multi-modal operations and container or roll-on/roll off traffic by trailers and ferries. When the seller has to furnish a bill of lading, waybill, or carrier's receipt, it fulfills this obligation by presenting such a document issued by a person whom it has contracted for carriage to the named destination.

CIP (Freight Carriage and Insurance Paid To ...named place of destination)

The term CIP is the same as CPT but with the addition that the seller has to obtain transport insurance against the risk of loss of or damage to the goods in transit. The seller contracts with the insurer and pays the insurance premium. CIF is used for goods carried by sea, while CIP is used irrespective of the mode of transport.  The seller bears all risks and all costs incurred until the goods are delivered to the first carrier on the seller's side, at which point title and risk pass to the buyer.

DAF (Delivered at Frontier...named place)

The term DAF is used typically when goods are being moved overland, and delivery of the goods will take place at the frontier of an adjoining country. The seller is responsible for getting the goods to the frontier, but before the customs border. The frontier must be clearly named. For example, goods being shipped from the U.S. to Mexico might have Laredo, Texas, named as the frontier. The shipper is responsible for delivering the goods to Laredo, while the buyer is responsible for bringing the goods across the border into Mexico and clearing Mexican customs.  Title and risk pass to the buyer when the goods are delivered to the named border by the seller.

DES (Delivered Ex-Ship...named port of destination)

The term DES means that the seller will make the goods available to the buyer on board the ship at the destination named in the sales contract. The seller has to bear the full cost and risk involved in bringing the goods there.  Title and risk pass when the seller delivers goods on board the ship.

DEQ (Delivered Ex Quay [Duty Paid]...named port of destination)
DDU (Delivered Ex Quay [Duty Unpaid]...named place of destination)

The term "Ex Quay" means that the seller makes the goods available to the buyer on the quay (wharf) at the destination named on the sales contract. The seller bears the full cost and risk involved in doing so. There are two Ex Quay contracts in use: "DEQ Ex Quay (duty paid)" and "DDU Ex Quay (duty unpaid)" in which the obligation to clear the goods for import is done by the buyer instead of the seller. To avoid confusion, parties should always use the full description of these terms, namely Ex Quay (duty paid)" or "Ex Quay (duty unpaid)."

DDP (Delivered Duty Paid...named place of destination)

The term DDP means that the seller must arrange and pay for the costs (excluding insurance) of delivering the goods to a final inland destination named by the buyer. While the term "Ex Works" signifies the seller's minimum obligation, the "Delivered Duty Paid ," when followed by the words naming the buyer's premises, denotes the seller's maximum obligation. The term "Delivered Duty Paid" may be used irrespective of the mode of transport.  Title passes from seller to buyer and the risk of loss transfers when the goods are delivered to the final destination point cleared for import. 

Incoterms - Summary of Seller's and Buyer's Responsibilities

Edited by Michael C. Dennis. Mr. Dennis is the author of  "1001 Collection Tools and Tips."