What Incoterms Are For
Incoterms are international rules, published by the International Chamber of Commerce, that answer three questions in an international sale:
- Who arranges and pays for each leg of transport?
- At what point does risk pass from seller to buyer?
- Who handles export and import formalities?
They are not payment terms, nor a complete contract. They are rules for allocating responsibility. Misunderstood, they lead to surprise invoices and disputes over damaged cargo.
The Key Principle
An Incoterm is always read together with a place: "FOB Montreal," "CIF Cotonou," "EXW Toronto warehouse." The Incoterm alone means nothing; it's the term + place pair that defines the commitment.
The Most Common Terms in Ocean Freight
EXW — Ex Works
The seller makes the goods available at their premises. Everything else falls to the buyer: loading, inland transport, export, freight, import, delivery. This is the minimum commitment for the seller and the maximum for the buyer.
Useful if you already control the logistics chain. Risky if this is your first import.
FCA — Free Carrier
The seller delivers the goods to the carrier designated by the buyer, at the agreed place, and handles export formalities. Risk passes at that point.
FOB — Free On Board
Historically the most used term in conventional ocean freight. The seller delivers the goods on board the vessel at the port of departure and manages export. From there, freight, insurance and import are the buyer's responsibility.
"FOB Montreal" therefore means: the seller covers everything up to loading in Montreal, and you take it from there.
CFR — Cost and Freight
The seller pays ocean freight to the destination port, but risk passes to the buyer as soon as the goods are loaded at departure. This is the most commonly misunderstood point in Incoterms: paying the freight and bearing the risk do not go together.
CIF — Cost, Insurance and Freight
Like CFR, but the seller also takes out minimum insurance on the goods. Risk still transfers at departure. Always check the actual scope of coverage: the contractual minimum is often narrower than people assume.
DAP — Delivered At Place
The seller assumes transport to the agreed destination, including risk, but the buyer handles import customs clearance and duties and taxes.
DDP — Delivered Duty Paid
The seller's maximum commitment: delivery to the agreed place, with import duties and taxes included. Convenient for the buyer, but the seller must genuinely be able to clear customs in the destination country.
How to Choose
A few practical guidelines:
- First import, little experience: favour a term where the seller handles more of the journey (CFR, CIF, DAP), while knowing who bears the risk.
- You want to control freight cost: FOB or FCA let you choose your own forwarder and negotiate your freight.
- You're exporting and want to limit exposure: FCA or FOB.
- Avoid DDP if you're not certain you can clear customs in the arrival country.
Common Mistakes
- Believing CIF means "all-inclusive to my door": no, it stops at the port and risk transfers at departure.
- Using FOB for inland transport: FOB is a maritime term.
- Writing an Incoterm without a place: the commitment becomes open to interpretation.
- Forgetting that local charges at the arrival port almost always exist, regardless of the term.
- Assuming the Incoterm also settles payment: these are two separate matters.
Incoterms and Documents
Whatever term is chosen, the documents remain the same: commercial invoice, packing list, bill of lading, and depending on the country, a certificate of origin or inspection. Our article Essential Ocean Shipping Documents details each one.
FAQ
Which Incoterm is most used for shipments to West Africa? FOB and CIF come up most often in the transactions we see, but the right term depends on your ability to organize freight and customs clearance.
Does the Incoterm change the amount of customs duties? Duties are calculated according to the import country's rules and the declared value. The Incoterm affects how that value is composed, not the local rates themselves.
Should the Incoterm be written on the invoice? Yes, along with the place. This is information expected by customs and by your forwarder.
Can VELOX work with any Incoterm? We adapt our involvement to the term chosen. Just tell us where your responsibility begins and ends.
Conclusion
Choosing the right Incoterm avoids half the unpleasant surprises of an import. If you're torn between two terms for a shipment from Canada, request a quote: we'll explain exactly what each one means for your situation.
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