31 January 2024

Beyond the Terms: An Introduction to Incoterms®

Import and export deals can be complex to navigate, including often confusing terminology. While terms in international transactions might be difficult to understand, businesses can save considerable headache by familiarizing themselves with International Commercial Terms. Better known as “Incoterms” today, Incoterms are crucial components of both domestic and international transactions. You or your business may use Incoterms daily. But user beware—many parties to international contracts use them incorrectly.

First codified in 1936, Incoterms are a set of three-lettered acronyms promulgated by the International Chamber of Commerce (ICC). The ICC created Incoterms to address an increasingly common problem: commercial buyers and sellers often transact with different expectations. They encounter unique rules, regulations, and trade customs when conducting business with diverse parties. Incoterms help remedy these issues by outlining the risks and responsibilities each buyer and seller has in a given purchase of goods. The aim is to minimize misunderstandings and errors in domestic and international negotiations. Each Incoterm outlines risks and responsibilities, such as:

  • Where the goods should be delivered,
  • Where and when the risk of loss transfers,
  • Who is responsible for organizing transportation,
  • Who handles and pays for insurance,
  • Who takes care of customs procedures, and
  • Who pays for customs, duties, and import Value Added Taxes.

Incoterms are invaluable to understanding a party’s duties in a contract. Today, all major nations have adopted the use of Incoterms. This makes them an accepted feature of trade by governments and legal authorities around the world. As such, when disputes inevitably arise, most legal institutions will look to Incoterms to discern a party’s obligations. However, Incoterms are only one component of an import or export contract. They should not be relied upon to outline every duty under a contract. Incoterms do not address:

  • The purchase price,
  • The time or method of payment,
  • The transfer of title,
  • Product liability,
  • Breaches of contract, or
  • Other contractual obligations.

These provisions should be addressed in the remainder of your contract. Failure to do so might lead to unwanted decisions in the event of dispute. Since their inception, Incoterms have undergone many changes. The most recent version of Incoterms—released in 2020—consists of eleven individual terms grouped into two categories. These two categories are divided by modes of transportation. The first category includes seven Incoterms that may be used for any mode of transportation:

  • Ex Works (EXW),
  • Free Carrier Alongside (FCA),
  • Carriage Paid To (CPT),
  • Carriage and Insurance Paid To (CIP),
  • Delivered at Place (DAP),
  • Delivered at Place Unloaded (DPU), and
  • Delivered Duty Paid (DDP).

Under EXW, for example, the seller is only required to make the goods available for pickup at the seller’s business or other specified location. The buyer assumes all other risks and responsibilities, including transportation and export/import formalities. DDP, on the other hand, indicates the seller will effectively assume all risk and responsibilities, including transportation and import/export clearances to the buyer’s country. The second category of Incoterms consists of four terms that may be used for sea and inland waterway transport only:

  • Free Alongside Ship (FAS),
  • Free on Board (FOB),
  • Cost and Freight (CFR), and
  • Cost, Insurance, and Freight (CIF).

Similar to the first group, risks and responsibilities in the second category vary widely by Incoterm. For example, terms like FOB generally indicate the seller will deliver goods on board the vessel named by buyer. CIF is much more expansive, indicating the seller will deliver goods to the port of destination by organizing transportation, loading them onto the ship, and paying for insurance.

The greatest value of Incoterms is their standardization and ability to make complex international transactions considerably simple. Incoterms help eliminate ambiguity within contracts and time spent at the negotiating table. Still, these terms are beneficial only when used correctly. In our next article, we dive further into the intricacies of Incoterms by discussing the first three terms relevant to any form of transportation: EXW, FCA, and CPT.

If you engage international transactions or use Incoterms, we strongly recommend you connect with authors Aimee J. Jachym and/or Marcus C. Hoekstra or another member of our corporate international practice.