Incoterms
Incoterms are the internationally recognised rules that define who pays for freight, insurance and duty, and where the risk transfers from seller to buyer.
Definition
Published by the International Chamber of Commerce, Incoterms allocate costs and risks between buyer and seller in an international sale. They say nothing about when ownership transfers — that is a matter for the contract of sale.
The two most common in general cargo are FOB, where the seller delivers goods on board the vessel and the buyer pays from there, and CIF, where the seller also pays freight and insurance to the destination port.
Example
Under FOB the buyer pays ocean freight and insurance. Under CIF the seller pays them but the risk still transfers at the origin port, which surprises many first-time importers.
When you will come across it
- Negotiating a purchase contract and deciding who carries the freight risk
- Comparing supplier quotes that are quoted on different terms
- Working out whether a lower FOB price is actually cheaper once you add freight
Frequently asked questions
What is the difference between FOB and CIF?
Under FOB the buyer arranges and pays for main carriage. Under CIF the seller pays freight and insurance to the destination port, but risk still passes to the buyer once goods are loaded at origin.
Do Incoterms determine who owns thegoods?
No. Incoterms cover cost and risk allocation only. Transfer of title is governed by the contract of sale and by the applicable law.
Which Incoterm is best for a first-time importer?
Many importers prefer FOB because it gives them control of the freight and visibility of the real cost, rather than having it bundled into the supplier's price.