Understanding Incoterms in International Trade

By Jean-Désiré Groguhé, Ph.D.

Incoterms (short for International Commercial Terms) are international rules established by the International Chamber of Commerce (ICC). Their purpose is to clarify the respective responsibilities of sellers and buyers in international sale contract. They define the allocation of carriage costs, risks during carriage, customs clearance obligations, responsibilities related to insurance and delivery.

Incoterms therefore clearly specify who is responsible for what? at which stage? and up to which point? in international transport and logistics chain. They play a crucial role in standardizing international trade practices, thereby avoiding misunderstanding and conflicts.

It is important to note that Incoterms are periodically revised by the ICC, generally every ten years. The currently applicable version is Incoterms 2020. For this reason, commercial contracts should always specify: “According to Incoterms 2020.”

1. Key Elements Covered by Incoterms

Incoterms determine how responsibilities, costs, and risks are shared between seller and buyer throughout several key stages of the logistics chain, including Packaging of the goods, pre-carriage to the place of departure, export customs formalities, loading onto the main means of carriage, International carriage, transport insurance (when applicable), unloading at destination, import customs formalities, final delivery to the agreed destination…

2. The Four Groups of Incoterms

Incoterms are divided into four main groups, depending on the level of responsibility assumed by seller and buyer.

Group E – Departure: Seller makes the goods available to buyer at their premises. Then buyer bears all costs and risks from the pick-up place.

Þ   EXW (Ex Works)

Group F – Main Carriage Unpaid: Seller delivers the goods to a carrier appointed by the buyer, or designated place. Buyer is responsible for the main carriage and the associated risks.

Þ   FCA (Free Carrier)

Þ   FAS (Free Alongside Ship)

Þ   FOB (Free On Board)

Group C – Main Carriage Paid: Seller arranges and pays for the main carriage, but the transfer of risk occurs before arrival at destination. Buyer assumes the risks from the port of shipment.

Þ   CPT (Carriage Paid To)

Þ   CIP (Carriage and Insurance Paid To)

Þ   CFR (Cost and Freight)

Þ   CIF (Cost, Insurance and Freight)

Group D – Arrival: Seller assumes most of the costs and risks until the goods reach the destination.

Þ   DAP (Delivered At Place)

Þ   DPU (Delivered at Place Unloaded)

Þ   DDP (Delivered Duty Paid)

4. How to Avoid Conflicts Related to Incoterms

Disputes in international trade often arise from incorrect selection or improper use of Incoterms. Each Incoterm has specific implications regarding carriage, costs, customs procedures and risk transfer. The following recommendations can help to avoid misunderstandings:

1. Choose the Incoterm Appropriate to the Mode of Transport

Some Incoterms are specifically designed for maritime carriage, including FOB, CFR, CIF, FAS.

For land, air, or multimodal transport, it is preferable to use: FCA, CPT, CIP, DAP.

2. Always Specify the Exact Place of Delivery

It is essential to indicate the precise location associated with the chosen Incoterm. For example, the mention “FOB Incoterms 2020 “is insufficient. But the mention “FOB Port of Vancouver – Incoterms 2020” is sufficient and correct. This precision avoids ambiguity regarding the exact point where costs and risks are transferred.

3. Clearly Indicate the Applicable Incoterms Version

Incoterms are updated regularly by the International Chamber of Commerce. Major versions include those issued in 2000, 2010, and 2020. It is therefore essential to use the last one and include in the contract: “According to Incoterms 2020.”

4. Ensure Consistency with the Transport Contract

The selected Incoterm must be consistent with carriage contract. For example, under FOB (Free On Board), the transfer of risk occurs when the goods are loaded onto the vessel. It is therefore important to ensure that transport contract covers risks after this stage to avoid potential disputes regarding liability or insurance coverage.

5. Clarify Responsibility for Insurance

Not all Incoterms require transport insurance. This is particularly the case for EXW, FOB. In such situations, the parties should clearly specify who is responsible for arranging insurance? the insured value of the goods? the risks covered?

6. Train the Teams Involved

A poor understanding of Incoterms can lead to customs delays, goods being blocked at the border, uninsured risks, unexpected logistics costs.

For this reason, it is essential that purchasing, sales, logistics, and customs teams are properly trained in their use.

Conclusion

Incoterms are an essential tool for securing international trade operations. Their proper use helps clarify the responsibilities of each party, reduce disputes, and optimize the management of logistics and commercial operations.

What is the meaning and legal scope of each of these abbreviations?  who is responsible for what? at which stage? and up to which point? Which Incoterm applies to your transaction? Advantages and disadvantages?

G.Pac Consulting Group supports you in understanding, choice making and strategically applying Incoterms in your contracts.