Modern international trade is inconceivable without standardization, and Incoterms is one of the key elements of this process. These are universal trading terms that govern the responsibilities of the parties in international deliveries. They not only promote transparency in trade operations but also allow the parties to effectively manage the risks associated with transportation, insurance, and liability for the cargo.
In this article, we will provide all 11 Incoterms explained. You will understand how to correctly choose the appropriate term and avoid common mistakes in the process of international trade.
- 1. Incoterm Definition
- 2. What Rights and Obligations Are Regulated by Incoterms?
- 3. Incoterms 2020 Rules for All Modes of Transport
- 4. Incoterms 2020 Rules for Maritime and Inland Water Transport
- 5. What Rights and Obligations Are Not Covered by Incoterms?
- 6. What Has Changed in Incoterms 2020 Compared To the 2010 Version?
- 7. How to Properly Use Incoterms?
- 8. Frequently Asked Questions
Incoterms (International Commercial Terms) are a set of international trading conditions developed by the International Chamber of Commerce (ICC). They define the rights and obligations of the parties in international trade transactions. The terms were first published in 1936 and have been regularly updated to reflect changes in global trade. The current 11th edition of Incoterms dates back to 2020.
The primary meaning of Incoterms lies in their role as a universal language in trade transactions. They ensure a common understanding of key terms of the deal, regardless of the countries in which the parties are located. The use of standardized rules helps minimize the risks of misunderstandings and legal disputes. All terms, such as the place and time of transferring responsibility for the cargo, the distribution of costs, and insurance obligations, are predetermined. This is especially important when dealing with different legal systems and language barriers.
Incoterms are an indispensable tool for any business operating in the international market. They make transactions more predictable, help manage risks, and protect the interests of both parties.
Incoterms regulate the key rights and obligations of the parties in international trade. They help clearly define who is responsible for the goods, transportation, insurance, and associated costs and risks at each stage of the transaction. The rules establish the moments of risk transfer between the buyer and the seller, as well as determine which party is responsible for customs clearance and the payment of various duties. With Incoterms, the seller and buyer can agree in advance on the distribution of responsibilities, minimizing the risks of unexpected costs and delays.
Among the key obligations regulated by Incoterms are:
- Responsibility for transportation: Incoterms clearly define at which stage of the shipment the responsibility for the cargo transfers from the seller to the buyer.
- Transportation costs: The distribution of expenses for transportation and insurance is determined based on the chosen delivery term.
- Customs formalities: Incoterms define the obligations of the parties regarding export and import, including the processing and payment of customs duties.
- Risks of damage or loss of cargo: Incoterms specify the moments when the risk for the safety of the cargo transfers from the seller to the buyer.
All Incoterms are divided into four groups, each characterized by its own distribution of responsibilities, costs, and risks:
| Group | Regulated issues | Rules |
|---|---|---|
| E | Shipment | EXW |
| F | Main transport at the buyer’s expense | FCA, FAS, FOB |
| C | Main transport at the seller’s expense | CPT, CIP, CFR, CIF |
| D | Delivery | DAP, DPU, DDP |
There are a total of 11 Incoterms. The latest edition from 2020 classifies them by mode of transport. Seven rules apply to all modes of transport, while the remaining four are specific to maritime and inland waterway transport.
The rules cover universal delivery conditions applicable to both maritime and any other modes of transport, including road, rail, and air transport. These rules are particularly convenient when goods are transported via multiple vehicles or when the mode of delivery may change during the logistics process. Including these rules in a contract allows for flexible organization of transportation and distribution of responsibilities between the seller and the buyer.
Out of the 11 Incoterms, 7 apply to all modes of transport:
3.1 EXW (Ex Works) – From the Warehouse
Seller’s obligations and risks: The seller has the minimum obligation. They provide the goods at their premises or another agreed location (e.g., a warehouse). The seller is not responsible for loading onto the transport vehicle, transportation, or export formalities.
Buyer’s obligations and risks: After receiving the goods, the buyer arranges for further transportation and assumes all related risks and costs.
3.2 FCA – Free Carrier
Seller’s obligations and risks: The seller delivers the goods to the location designated by the buyer. The choice of transfer location affects the extent of the seller’s responsibility: if the goods are handed over at the seller’s warehouse, they are only responsible for loading. If the goods are transferred at another location (e.g., at a port or terminal), the seller arranges for loading onto the transport vehicle. The responsibility for preparing export documentation also rests with the seller.
Buyer’s obligations and risks: From the moment the cargo is loaded, the risks and responsibilities for the subsequent stages transfer to the buyer.
3.3 CPT – Carriage Paid To
Seller’s obligations and risks: The seller arranges for transportation and pays the main transportation costs up to the agreed destination.
Buyer’s obligations and risks: From the moment the goods are handed over to the carrier, the risks transfer to the buyer.
3.4 CIP – Carriage and Insurance Paid To
Seller’s obligations and risks: The seller pays for transportation and insures the cargo against damage or loss up to the agreed destination, providing additional protection for the buyer.
Buyer’s obligations and risks: The risks transfer to the buyer upon handing over the goods to the carrier.
3.5 DAP – Delivered at Place
Seller’s obligations and risks: The seller assumes all costs and risks, including export formalities, until the goods arrive at the destination.
Buyer’s obligations and risks: The buyer is responsible for unloading.
3.6 DPU – Delivered at Place Unloaded
Seller’s obligations and risks: The seller is responsible for delivering and unloading the goods at the agreed destination. They bear all risks and costs associated with transportation, including export formalities.
Buyer’s obligations and risks: The buyer is responsible only for paying import duties and taxes.
3.7 DDP – Delivered Duty Paid
Seller’s obligations and risks: The seller bears full responsibility for delivering the goods to the destination, including the payment of all customs duties, taxes, and expenses.
Buyer’s obligations and risks: The risks transfer to the buyer only after the delivery and unloading of the goods.
The rules are specifically designed for transactions where transportation is carried out exclusively by water. They are optimal for situations where goods are transported on vessels and are convenient for items such as bulk or oversized cargo. The main maritime Incoterms take into account the specifics of loading and unloading, as well as the peculiarities of port operations.
Four Incoterms apply for maritime shipping:
4.1 FAS – Free Alongside Ship
Seller’s obligations and risks: The seller is responsible for delivering the cargo to the quay alongside the vessel at the agreed port of shipment and completing all export customs formalities.
Buyer’s obligations and risks: The buyer arranges for loading onto the vessel and assumes further transportation along with the associated costs and risks.
4.2 FOB – Free on Board
Seller’s obligations and risks: The seller is responsible for delivering and loading the goods onto the vessel at the agreed port of shipment.
Buyer’s obligations and risks: Once the cargo crosses the ship’s rail, the responsibility and risks transfer to the buyer.
4.3 CFR – Cost and Freight
Seller’s obligations and risks: The seller is responsible for delivering the goods onto the vessel. Additionally, they pay the freight charges up to the port of destination.
Buyer’s obligations and risks: The risks transfer to the buyer from the moment the goods are loaded onto the vessel at the port of departure.
4.4 CIF – Cost, Insurance and Freight
Seller’s obligations and risks: Similar to CFR, the seller is responsible for delivering the goods onto the vessel and for paying the freight charges up to the port of destination. However, they are also required to provide minimum insurance coverage for the cargo until it reaches the port of destination.
Buyer’s obligations and risks: The risks transfer to the buyer after loading onto the vessel.
Despite the extensive regulation of delivery terms, Incoterms do not cover some important aspects of trade transactions. These rules only address issues related to transportation, distribution of costs, risks, and the obligations of the parties. Other key areas must be separately addressed in the contract by the parties to the trade transaction. These include:
5.1 Payment terms
Incoterms do not specify how and when the buyer must pay for the goods. The contract should separately state the payment terms, such as bank transfer, letter of credit, or other forms of payment.
5.2 Transfer of ownership
Incoterms rules only regulate the moment of risk transfer but not the ownership rights to the goods. The rights to the goods, including the moment they transfer from the seller to the buyer, should be documented in the contract.
5.3 Quality control and inspection of the goods
Incoterms do not regulate the obligations related to the inspection of product quality. If inspection or testing of the goods is required before shipment or upon arrival, this condition should be included separately in the contract.
5.4 Liability for delays and penalties
Incoterms do not cover issues related to the consequences of delays or penalties. The contract can specify liability for delays and other punitive measures.
5.5 Force majeure
Incoterms do not regulate force majeure situations, such as natural disasters or military actions. The course of action and distribution of risks in such situations should be separately outlined in the contract.
The latest changes to Incoterms occurred in 2019, ten years after the release of the previous 2010 version. The new amendments adapted the rules to the realities of today’s market and helped international companies reduce risks associated with the export and import of goods. The updates addressed the following aspects:
- The DAT (Delivered at Terminal) term has been removed and replaced with DPU (Delivered at Place Unloaded). This change emphasized the possibility of delivery not only to terminals but also to any location where unloading may be required.
- The FCA (Free Carrier) conditions in the new publication allow for the notation of the onboard bill of lading to be made before the actual loading of the goods onto the vessel. Now, sellers can document the transfer of the cargo and its readiness for shipment in advance, which reduces the likelihood of misunderstandings between the parties.
- For the CIF and CIP conditions, the insurance requirements have been updated. Under CIP conditions, a higher level of insurance coverage is now required, corresponding to Clause A of the Institute Cargo Clauses. This provides better protection for the interests of the buyer.
- In the 2020 version, costs are now centrally displayed in points A9 and B9 of each rule. The parties can quickly see which costs are borne by each party at different stages of delivery.
- In the previous version, organizing transportation with one’s own vehicles was prohibited. The new edition of the rules allows, under the terms FCA, DAP, DPU, and DDP, to deliver goods without involving third-party carriers.
- Incoterms 2020 now clearly places the responsibility for meeting safety requirements and related additional costs on the seller. This change provides greater clarity in the allocation of risks and obligations between the parties.
To effectively use Incoterms in transactions, it is important to understand not only the basic international commercial terms but also how to properly integrate them into contractual conditions. Here are some tips to help you apply Incoterms effectively in your practice:
7.1 Clearly specify the place of dispatch or port
When formalizing an international transaction, it is crucial to clearly specify the place of dispatch or port in the Incoterms conditions. This will reduce the likelihood of misunderstandings and minimize the risk of incurring additional costs. For example, if you are using the FOB term, you should precisely indicate the port from which the goods will be shipped. Both parties must clearly understand where the seller’s responsibility ends and the buyer’s responsibility begins.
7.2 Include Incoterms delivery terms in the sales contract
To ensure that the Incoterms apply to your transaction, they must be included in the sales contract or any other documents specified by the parties. The International Chamber of Commerce (ICC) recommends clearly stating the chosen term along with its name and place of delivery to define the parties’ obligations. For clarity, it is also advisable to specify the version of Incoterms you are using (for example, Incoterms® 2020) in the contract. This will help eliminate misunderstandings and simplify the understanding of each party’s obligations, ensuring compliance with current rules and standards.
7.3 Choose the Incoterms that are suitable for your transportation
There are many Incoterms, each suited for different scenarios. Before making a choice, it is important to thoroughly assess your needs and objectives:
- Nature of the cargo and suitable transport: Evaluate the characteristics of the cargo and the available transportation options. For example, for fragile goods, it is important to arrange insurance in case of damage. Therefore, it is advisable to choose terms that include or allow for additional insurance coverage, such as CIF or CIP. This will help reduce risks and protect the cargo from potential losses. For bulk goods, it is better to consider terms that include loading onto a vessel.
- Transportation costs: Consider your capacity and willingness to take on the delivery costs. If you are the seller, look at terms like FCA or FOB, which entail lower costs for the seller. For the buyer, the CIP or CIF terms may be more preferable, where the seller is responsible for the delivery and insurance of the cargo.
- Customs requirements of the importing country: Different countries have varying rules and requirements for importing goods. Different types of Incoterms may better align with specific tax or import requirements. This approach can simplify customs clearance, reduce costs, and avoid delays at the border.
7.4 Remember, Incoterms do not regulate all aspects of the transaction
Incoterms supplement but do not replace the sales contract. The rules do not cover all the conditions necessary for the complete protection of the parties’ interests. In particular, they do not regulate issues related to the transfer of ownership of the goods, payment terms, dispute resolution procedures, and force majeure circumstances. It is important for the parties to clarify additional aspects of the transaction to avoid potential disagreements and minimize legal risks.
7.5 Consult a Freight Forwarder on Incoterms
Incoterms may seem easy to understand, but their practical application requires consideration of many nuances. Logistics specialists can advise on how to properly prepare documents for each specific transaction. They will take into account all the characteristics of your cargo and route to recommend terms that best meet your requirements. This will help you avoid difficulties at customs and reduce the likelihood of disputes.
The correct selection and application of terms will help the parties clearly define their responsibilities, minimize risks, and eliminate additional costs. The prudent use of Incoterms will significantly enhance the efficiency of your operations and strengthen your position in the international arena.
1. Why are Incoterms rules so important?
Incoterms rules establish clear and understandable conditions for the delivery of goods. They help define the responsibilities, risks, and costs for both the seller and the buyer, reducing the likelihood of misunderstandings and disputes. Furthermore, these rules standardize trade terms on a global level, facilitating interactions between different countries and legal systems.
2. How to correctly reference Incoterms conditions in a contract?
The International Chamber of Commerce (ICC) recommends specifying the chosen Incoterms conditions in the contract, including their name and, if necessary, the specific place of delivery. This helps to avoid confusion and misunderstandings between the parties.
3. How often are Incoterms updated?
Incoterms are updated every ten years. The latest 11th version of Incoterms came into effect on January 1, 2020.
4. Is it possible to use the 2010 version of Incoterms for a transaction?
Yes, the 2010 version of Incoterms can still be used in international transactions if both parties agree to it. It’s important to clearly indicate the use of the older version of the rules in export documents and the sales contract to avoid potential conflicts.
5. Which Incoterms 2020 rules apply to sea freight?
Specialized rules have been created for sea and inland waterway transport: FAS, FOB, CFR, and CIF. These terms take into account all aspects of sea freight, including loading and unloading.
6. Which Incoterms are best suited for air freight?
For air shipment, the suitable Incoterms rules are EXW, FCA, DPU, DAP, CPT, CIP, and DDP. These terms are designed for use with any mode of transport, including air, and provide flexibility in allocating responsibilities and risks between the parties.
7. Which Incoterms are suitable for land transport?
Similar to air cargo, the following 7 Incoterms rules apply to land transport: EXW, FCA, DPU, DAP, CPT, CIP, and DDP.
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