In the world of global trade, where transactions cross national borders, it is crucial to clearly define responsibilities for transport, risk, and costs. This is precisely why the International Chamber of Commerce (ICC) created Incoterms (International Commercial Terms) – a set of universal rules for interpreting the most commonly used trade terms. Understanding them is fundamental to success and minimising risks.
Why are Incoterms so important?
Incoterms are not just a collection of abbreviations. They are precise rules that define:
- The moment when the risk of loss or damage to goods transfers from the exporter to the importer.
- The allocation of transport, insurance, customs, and other costs.
- The obligations of the parties regarding documentation, loading, and unloading.
Failing to precisely specify the Incoterms rule in a trade contract, or misinterpreting it, can lead to costly disputes, delivery delays, and unexpected expenses.
Incoterms 2020: 11 Rules in Brief
The latest edition, Incoterms 2020, consists of 11 rules divided into two groups:
- Rules for all modes of transport (multimodal):
EXW (Ex Works): Minimum obligations for the seller, maximum for the buyer. Risk and costs transfer when the goods are collected at the seller’s premises.
FCA (Free Carrier): The seller delivers the goods to a carrier designated by the buyer at an agreed location. Risk transfers when the goods are handed over to the carrier. New in Incoterms 2020: option to issue an “on‑board” B/L.
CPT (Carriage Paid To): The seller pays for transport to the specified destination, but risk transfers when the goods are handed over to the first carrier.
CIP (Carriage and Insurance Paid To): Similar to CPT, but the seller also insures the goods for the buyer’s benefit (extended “A” insurance coverage in Incoterms 2020).
DAP (Delivered at Place): The seller bears the cost and risk of transport to the specified destination. Unloading is the buyer’s responsibility.
DPU (Delivered at Place Unloaded): New in Incoterms 2020, replacing DAT. The seller bears the cost and risk of transport and unloading at the specified destination.
DDP (Delivered Duty Paid): Maximum obligations for the seller, who covers all costs and risks, including import duties and taxes. - Rules for sea and inland waterway transport:
FAS (Free Alongside Ship): The seller delivers the goods alongside the ship at the loading port. Risk transfers at this point.
FOB (Free on Board): The seller delivers the goods on board the ship at the loading port. Risk transfers when the goods are loaded onto the ship.
CFR (Cost and Freight): The seller pays the freight to the destination port, but risk transfers when the goods are loaded onto the ship at the loading port.
CIF (Cost, Insurance and Freight): Similar to CFR, but the seller also insures the goods (minimum “C” insurance coverage in Incoterms 2020).
How to choose the right Incoterms rule?
The choice depends on many factors:
- Type of goods and industry: Are the goods sensitive or require special transport?
- Mode of transport: Sea, air, road, rail?
- Level of control and risk: How much responsibility do you want to assume as the seller/buyer?
- Experience and trust in partners: How well do you know the other party to the transaction?
Always clearly specify the version of Incoterms (e.g., “FOB Gdynia, Incoterms 2020”) and the exact location where risk/costs transfer.
Avoid mistakes – it pays off!
The most common mistakes are:
- Using outdated versions (e.g., Incoterms 2000).
- Applying maritime rules to multimodal transport (e.g., FOB for air transport).
- Lack of precision in specifying the location.
- Misunderstanding the scope of insurance.
Accurate use of Incoterms is the foundation of effective and safe international trade. Investing in understanding these rules is an investment in the stability of your business.
