Incoterms

Incoterms: A concise guide

What are Incoterms?

Incoterms (International Commercial Terms) are standardized trade terms published by the International Chamber of Commerce (ICC). They define key responsibilities between buyers and sellers in domestic and international goods transactions—who arranges transport, who pays freight and insurance, and where risk transfers—reducing ambiguity in contracts.

Always state which version of Incoterms the contract follows (e.g., Incoterms 2020).

How they’re organized

Incoterms are grouped into:
– Rules for any mode of transport (applicable to road, rail, air, and multimodal shipments).
– Rules for sea and inland waterway transport (specific to shipments by vessel).

The 11 Incoterms (Incoterms 2020) — brief summaries

Rules for any mode of transport:
– EXW (Ex Works): Seller makes goods available at their premises. Buyer bears nearly all costs and risks from pickup onward.
– FCA (Free Carrier): Seller delivers goods to a named carrier or place; responsibility passes at that point.
– CPT (Carriage Paid To): Seller pays freight to the named destination; risk transfers when goods are handed to the carrier.
– CIP (Carriage and Insurance Paid To): Like CPT but seller also arranges and pays for minimum insurance to the destination.
– DAP (Delivered at Place): Seller delivers goods ready for unloading at the named place; buyer handles import formalities and costs.
– DPU (Delivered at Place Unloaded): Seller delivers and unloads goods at the named place; risk and costs transfer after unloading.
– DDP (Delivered Duty Paid): Seller delivers goods cleared for import at the destination and bears all costs, duties, and risks until delivery.

Rules for sea and inland waterway transport:
– FAS (Free Alongside Ship): Seller places goods alongside the vessel; buyer handles loading, carriage, and risks thereafter.
– FOB (Free on Board): Seller loads goods on board vessel; risk transfers once goods are on board.
– CFR (Cost and Freight): Seller pays cost and freight to the named port of destination; risk transfers when goods are on board.
– CIF (Cost, Insurance and Freight): Like CFR, but seller also arranges and pays for minimum insurance to the destination.

What Incoterms cover — and what they don’t

Incoterms clarify:
– Allocation of transport costs and risk transfer points.
– Who arranges carriage, export/import formalities, and (in some terms) insurance.

Incoterms do not cover:
– The identity or specification of the goods, contract price, or payment terms.
– Passage of legal title/ownership.
– Full list of documents required for customs clearance.
– Remedies for nonconforming goods, delivery delays, or dispute resolution.

Because of these limits, Incoterms should be used alongside a complete sales contract that covers price, title, payment, inspection, warranties, and dispute mechanisms.

Key differences: Incoterms 2010 vs. 2020

Major practical updates in 2020 include:
– DAT (Delivered at Terminal) renamed to DPU (Delivered at Place Unloaded) to emphasize any place of unloading, not only terminals.
– CIP now requires higher minimum insurance coverage; CIF insurance requirements remained unchanged.
– Better clarity for situations where buyer or seller uses their own transport (not only third‑party carriers).
– FCA was revised to address issuance of bills of lading in seller-carrier arrangements.
– Security-related cost allocation clarified: export security costs are generally borne by the seller (except EXW); import security costs by the buyer (except DDP).

You can still use Incoterms 2010 if both parties explicitly agree to do so in writing, but specifying the version avoids misunderstandings.

Advantages and disadvantages

Pros:
– Internationally recognized and easy-to-understand standard terms.
– Reduce negotiation time and legal ambiguity.
– Periodic ICC updates reflect current trade practices.

Cons:
– Parties may prefer different terms (e.g., sellers often favor CIF, buyers FOB), leading to negotiation friction.
– Some terms can expose one party to significant costs or risks if chosen without care.
– Incoterms do not replace the need for a full sales contract.

Practical tips

• Always specify the Incoterms version (e.g., “Incoterms 2020”) and the named place or port.
• Match the term to your capacity: choose terms that reflect who will handle transport, insurance, and customs.
• Use Incoterms to define cost and risk allocation, but draft separate contract clauses for title transfer, payment, warranties, and dispute resolution.
• Consider insurance beyond the minimum required by certain terms (e.g., CIP vs. CIF).

Bottom line

Incoterms provide a concise, standardized way to divide transport costs, risks, and responsibilities between buyers and sellers. They greatly simplify international trade negotiations, but they do not replace a comprehensive sales contract. Choose the appropriate term and version deliberately and document any additional obligations not covered by the chosen Incoterm.