International shipping can be confusing and daunting. It's important to learn all the shipping terms, know which party organisers the carrier for the transport of goods, know who is responsible for the goods and when, and even knowing who pays for cartage and insurance. Mix in the different requirements and terms set by governments around the world, as well as language barriers between countries, and you have the potential for misunderstandings and disputes.
Enter the International Chamber of Commerce (ICC), who developed international rules, known as Incoterms, to help with the interpretation of shipping terms around the world. Incoterms have made international trade easier and less risky for everyone involved.
What Are the Incoterms for International Shipping?
Incoterms are pre-defined commercial terms from the ICC. They are three-letter abbreviations for trade terms for common contractual sales practices.
Incoterms were first published in 1936 by the ICC to eliminate disputes over who pays for freight, insurance, and other shipping costs during the shipment of goods, with the current version being Incoterms 2020.
The ICC introduced these shipping terms to define costs and risks relating to the transportation and delivery of goods in sales contracts worldwide. The terms remove the uncertainties around interpretations and have been accepted by governments, legal authorities, and contractors. This means that parties can use Incoterms to help inform a number of decisions that can be made during the delivery of goods from the buyer to the seller. They are particularly important for defining the transfer of risk - the point at which the risk of the seller passes on to the buyer when they take ownership of the goods.
There are 11 Incoterms rules used across 140 countries. The terms include:
- EXW – Ex Works
This term ensures that goods are made available at the place of the seller (or other named place), so that the buyer incurs the risk and cost of loading and transporting goods to their destination. The seller doesn’t need to clear the goods for export.
- FCA – Free Carrier (Named Place)
'Free Carrier' refers to the seller, ensuring that the goods are delivered ready for export to the carrier or another person nominated by the seller, at an agreed place that the buyer nominates. Risk passes to the buyer at the agreed place.
- CPT – Carriage Paid To
This term means that the seller delivers the goods to a carrier or another person nominated by the seller at an agreed place. The goods are considered delivered once the main carrier takes receipt of them.
- CIP – Carriage and Insurance Paid To
'Carriage and Insurance Paid To' refers to the seller, ensuring the goods are delivered to the carrier or another person nominated by the seller at an agreed place between both parties. The seller is responsible for contracting and paying for the costs of carriage to send the goods to their destination. The seller is also responsible for the insurance cover against the buyer’s risk of loss or damage to the goods during carriage.
- DAT – Delivered at Terminal
This term indicates that the seller must deliver the goods to a nominated port or place. The terminal may be a quay, warehouse, container yard, or road, rail, or air cargo terminal. The seller bears all risk in carrying and unloading the goods to the named port or place of destination.
- DAP – Delivered at Place
'Delivered at Place' requires that the seller deliver the goods when placed at the disposal of the buyer on the arriving transport ready for unloading.
- DDP – Delivered Duty Paid
This term indicates that the seller must deliver the goods when they are placed at the disposal of the buyer, cleared for import and ready for unloading at their destination. The seller is responsible for the costs, risks involved in clearing the goods for import and export, pay for carriage, customs and duties.
- FAS – Free Alongside Ship
'Free Alongside Ship' relates to goods that are transported by sea or inland waterway. This term indicates that the seller must deliver the goods, cleared for export, alongside a ship or vessel that has been docked at a named port. Risk of loss or damage then passes to the buyer, who is also responsible for loading the goods and any costs incurred later on.
- FOB – Free on Board
'Free on Board' indicates that the seller must deliver the goods on board a vessel nominated by the buyer at the port of shipment. The carriage cost, risk of damage and potential loss of goods passes to the buyer once the goods are on board the vessel.
- CFR – Cost and Freight
This term indicates that the seller must deliver the goods on board a vessel or procure the goods already delivered. Risk of loss or damage to goods passes once the goods are on board. The seller is responsible for the costs and freight to move the goods to the named port of destination.
- CIF – Cost, Insurance and Freight
'Cost, Insurance and Freight' refers to the seller delivering the goods on board a vessel or procure the goods already delivered. Risk of loss or damage passes to the buyer when the goods are on board the vessel. The seller must contract and pay the costs of the freight to move the goods to the named destination. The seller is responsible for minimum insurance cover.
Two of the most common Incoterms are FOB and CIF.
Important Destination and Carrier Shipment Terminology
While Incoterms are extremely important, they are not the only terms that are used when it comes to the transportation of goods. There are instances where complications may arise, such as one party needing a change in the destination to one that is not listed in the shipping documentation. There could also be instances where some shipments need to be looked at a little more closely, such as small or urgent deliveries containing goods, as well as the cost of shipping.
Change of Destination Requests
A Change of Destination (COD) request is simply a piece of documentation asking the carrier to transport the cargo to a different destination than the one that is listed on the Bill of Lading. It's important to understand whether or not the party requesting a Change of Destination actually has the authority to do so before the request goes any further. There are a number of other considerations to be made, as Change of Destination requests have the potential to be complicated and cause problems.
Air Freight Terms
One of the more common reasons that air freight is used is for urgent and/or high-value goods that require a little more attention than standard shipments. For goods that are being shipped internationally via air, terms such as 'air waybill' (AWB) are used. Air waybills help provide details about the shipment and also allow it to be tracked, with each party involved in the shipment receiving the same documentation. There are a number of terms used between parties involved in an air freight shipment, including:
- MAWB – Master Air Waybill
A Master Air Waybill is issued by the main carrier of goods on receipt of the shipment from a freight forwarder to deliver at the destination as per agreed terms.
- HAWB – House Airway Bill
A House Airway Bill is issued by a freight forwarder when goods are received from a shipper agreeing to deliver the goods at the destination.
Container Ship Terms
When container ships or vessels are involved in the transport of goods, there a number of terms that all parties may encounter. When it comes to the cost of shipping, it all depends on whether the buyer fills the container with their own goods or whether they share a container with goods from a range of companies. This is where the parties involved in a transfer of cargo may come across terms such as 'full container load' and 'less than container load'.
- FCL – Full Container Load
'Full Container Load' indicates that a container is filled with the goods of one customer.
- LCL - Less Than Container Load
'Less Than Container Load' refers to goods of multiple clients being used to fill the container. Read more about FCL vs LCL here.
If you need assistance with product sourcing in China and international freight and shipping, contact Vara Allied on (08) 6115 0118 or contact us online.