Beginner’s Guide to Shipping Terms

Shipping terms are one of the first things to learn when you’re looking to start importing or exporting. Unlike Payment Terms, which is an agreement on when you or the other party actually have to pay for goods (eg: 30% upfront, 70% on completion of order etc.), shipping terms set out the supplier’s and buyer’s responsibilities and risks during the shipping process.

Imagine that you go to your local appliance store to purchase a new washing machine. They give you a price of $500. Now the question becomes, does that price mean you have to pickup the washing machine from the store? Or does it include delivery to your doorstep? Or does it include delivery and installation into your home? Where does the store’s responsibility end and yours start? And where does the risk transfer? and is there insurance included?

There is a lot of questions to ask, right? And that example is only a local delivery situation. In international transactions there can be many more steps involved and the consequences of misunderstanding your rights and responsibilities when buying or selling can be much more severe. This is where the ‘shipping terms’ come in.

Shipping terms try and simplify the shipping services and establish who does what, and when the risk transfers from supplier to buyer. The most common shipping terms used worldwide are published by the International Chamber of Commerce- the latest iteration called INCOTERMS® 2020. These terms are almost universally used which means that the rules they set out can be understood and applied on international contracts, even across different languages.

In this article, we’ll discuss only the main terms which are most commonly used by small businesses and first-time importers/exporters to help you get started.

The three main terms that you will come across are: EXW (Ex-Works), FOB (Free on Board) and CFR (Cost, Insurance and Freight).

It is important to note that although the terms ‘FOB’ and ‘CFR’ and ‘CIF’ are still commonly used for air freight and containerized sea freight consignments, they’re not really recommended for these types of multimodal transport. As mentioned in our article on INCOTERMS® 2020, the terms FOB, CFR and CIF are not technically accurate for these types of transport. However, for the time being, they are still commonly used and so you will see them come up when you start to import and/or export.

Ex Works terms means that it is the supplier’s responsibility to make the cargo available at their factory. It is then the buyer’s responsibility to collect and load the cargo, arrange all customs formalities and all shipping costs. In the example with the washing machine above, EXW terms would be the equivalent of buying the washing machine from the store, and then having to pick it up from the store and arrange everything from that point onwards. It is also the responsibility of the buyer to arrange insurance for the goods, if they choose.

FOB (or ‘FCA – Free Carrier’ which is more appropriate for containerized sea or air transport) means that it is the supplier’s responsibility to deliver the cargo to the port in the country of export and have the export customs clearance arranged. It is then the responsibility of the buyer to arrange the shipping of the goods from that port to the final destination. Terms starting with ‘F’ by their nature are very ‘friendly’ to the buyer because the obligation is on the seller to deliver the goods already cleared for export, thereby removing any potential border control or taxation challenges that might exist in an EXW transaction.

CFR (or ‘CPT – Carriage Paid To’ which is more accurate for containerized sea or air transport) means that the supplier arranges the shipping of the goods to a named place, typically a port or airport at destination. The supplier completes their obligation and the risk transfers to the buyer when the goods are handed over to the carrier the supplier is contracting with. It is then the buyer’s responsibility to collect the goods from this carrier and arrange all remaining clearance and port/terminal formalities. It is also the responsibility of the buyer to arrange insurance for the goods, if they choose.

If the term has an ‘I’ in it, for instance ‘CIF – Cost, Insurance & Freight’ (or ‘CIP – Carriage and Insurance Paid To’ which is more appropriate for containerized sea or air transport) then it is the responsibility of the seller to arrange the insurance for the goods.

Shipping terms are usually negotiated between the buyer of the goods and the seller of the goods and is then included as part of the contract of sale. For example, let’s say that you were looking to buy a washing machine from a supplier in Shanghai, China. The supplier gives you a price for the machine “FOB Shanghai” for $500. By using that term, you know that in their price they have included the cost to deliver the washing machine to the port of Shanghai, arranged the export documentation and export customs clearance and paid the local port & terminal fees. It will then be your responsibility as the buyer to arrange the freight from Shanghai to Australia, pay the import port & terminal fees, import customs clearance and delivery to your door. If you’re happy with that price that they have given you “FOB Shanghai” then you can agree to it and it will be included in the sales contract, commercial invoice or proforma invoice for you to then arrange payment. Keeping in mind that these transactions are a negotiation and so if you are unhappy with the price or the shipping terms they have given, you can discuss to have it changed.

• • • INCOTERMS® 2020 are not law. They are a voluntary set of rules that traders need to agree to and explicitly incorporate into a contract of sale.
    • Once the Incoterms® 2020 have been incorporated into a contract, they become part of the legal agreement and are, therefore, enforceable under the law applicable to the contract of sale.
    • The revision year (i.e. 2020) must be specified to avoid any misunderstandings as this is the 9^th time INCOTERMS have been updated. Eg: FOB Shanghai, INCOTERMS® 2020
    • Ownership of the goods, the transfer of title and retention of title cannot be determined by examining only the Incoterms® 2020 portion of a contract. Traders should include an appropriate ownership clause in their contract.
    • INCOTERMS® 2020 do not include rules for payment terms.