Incoterms, short for International Commercial Terms, are a set of global rules established by the International Chamber of Commerce (ICC) that define the responsibilities of sellers and buyers for the delivery of goods under sales contracts. They are used worldwide to clarify the tasks, costs, and risks involved in the transportation and delivery of goods from sellers to buyers.
The primary aim of Incoterms is to provide a universal set of rules that clearly communicate the obligations, costs, and risks associated with the international and domestic transportation and delivery of Cargo insurance is a key consideration for exporters to protect their interests during transit. By doing so, Incoterms help prevent misunderstandings and disputes between sellers and buyers, facilitating smoother international trade.
The Structure of Incoterms
Incoterms are categorised into two groups based on the mode of transport used:
- Any Mode(s) of Transport: These are applicable to any type of transportation, including road, rail, air, and sea. Examples include EXW (Ex Works), FCA (Free Carrier), CPT (Carriage Paid To), CIP (Carriage and Insurance Paid To), DAP (Delivered at Place), DPU (Delivered at Place Unloaded), and DDP (Delivered Duty Paid).
- Sea and Inland Waterway Transport Only: These are specifically for goods transported by sea or inland waterway, governed by specific Incoterms rules. Examples include FAS (Free Alongside Ship), FOB (Free on Board), CFR (Cost and Freight), and CIF (Cost, Insurance, and Freight), which are critical for understanding the costs associated with shipping.
What Incoterms Do Not Cover
While Incoterms® 2020 are essential trade terms in foreign trade, it’s important to understand what they don’t cover. Incoterms 2020, like previous versions of Incoterms such as Incoterms 2010, do not address the transfer of ownership or title to the goods.
They also don’t cover payment terms or contract of sale conditions beyond those related to delivery, and the Incoterms rules don’t deal with breaches of contract or product quality issues, which are essential for both the buyer and seller. While they specify which party is responsible for customs clearance and who pays for it, they don’t cover specific customs procedures or documentation requirements. Incoterms® 2020 rules also don’t address insurance requirements, except for CIF and CIP terms, which require the seller to obtain minimum cover under the Institute Cargo Clauses, leaving the buyer and seller to negotiate additional coverage.
It’s crucial to note that Incoterms don’t replace the need for a detailed sale of goods agreement. They don’t cover what happens if the goods for export are damaged during transit or if there are delays in shipment, which can significantly impact the seller to the buyer relationship. While Incoterms specify where the seller delivers the goods and where the risk transfers, they don’t dictate what happens if the buyer fails to unload the goods at the place of destination or port of destination.