Incoterms: Technical Definition and Structure

Incoterms: Technical Definition and Structure

Incoterms (International Commercial Terms) are a set of pre-defined commercial terms published by the International Chamber of Commerce (ICC) that allocate the respective obligations, costs and risks between seller and buyer for the delivery of goods in international and domestic trade.

They are not statutes or mandatory law but are contractual clauses commonly incorporated into sales contracts to provide clarity and reduce disputes over who pays for transport, insurance and customs formalities, and at which point risk passes from seller to buyer.

The structure of Incoterms is designed to address three principal elements of a goods delivery transaction:

• Allocation of costs — which party pays for transport, loading/unloading, export and import formalities, duties, and other transactional expenses.
• Allocation of risk — the exact point at which the risk of loss or damage shifts from seller to buyer.
• Transfer of delivery — the specific event or place that constitutes delivery under the contract (for example, delivery at the seller’s premises, on board a ship, or at a named terminal).

Incoterms are organized to cover different transport needs and modes. Since the 2010 edition the ICC has grouped the rules into two broad categories:

• Rules for any mode of transport — EXW, FCA, CPT, CIP, DAP, DPU, DDP. These can be used whether transport is by road, rail, air, sea, or multimodal combinations.
• Rules for sea and inland waterway transport — FAS, FOB, CFR, CIF. These remain useful where carriage is predominantly by ship.

Commonly used Incoterms and their basic effect:

• EXW (Ex Works) — Seller’s obligation is minimal: make goods available at seller’s premises. Buyer bears almost all costs and risks from collection onward.
• FCA (Free Carrier) — Seller delivers goods to a carrier or other person nominated by buyer at a named place; risk passes at that point.
• FOB (Free On Board) — Used for sea transport: seller loads goods on board vessel nominated by buyer; risk passes when goods are on board.
• CFR (Cost and Freight) — Seller pays costs and freight to bring goods to the named port of destination; risk transfers when goods are on board at origin.
• CIF (Cost, Insurance & Freight) — Like CFR but seller must also procure maritime insurance for buyer’s risk during transit to the named port.
• CPT/CIP (Carriage Paid To / Carriage and Insurance Paid To) — Seller pays freight to a named destination; under CIP the seller must also obtain insurance for the buyer’s risk.
• DAP / DPU / DDP (Delivered at Place / Delivered at Place Unloaded / Delivered Duty Paid) — Seller bears carriage costs to named place; DPU requires seller to unload, DDP places maximal obligations on the seller including import duty and customs clearance.

Two further technical dimensions are important in practice:

• Insurance obligations — Some terms (CIF, CIP) require the seller to obtain insurance; the level of required cover differs across Incoterms versions and rules, so contracts should be specific about the scope of insurance required.
• Transport document and delivery evidence — The seller’s ability to comply often depends on issuing documents (bill of lading, CMR, airway bill, multimodal transport document). Incoterms determine who bears the cost and responsibility of obtaining the necessary transport and customs documentation.

Practical features that users must observe:

• Name the place and the Incoterms edition — Always specify the named place or port (for example, "CIF Rotterdam Incoterms 2020"). Also specify the Incoterms edition (Incoterms 2020) to avoid confusion over rule updates.
• Understand risk vs title — Incoterms allocate risk transfer, not title or ownership of the goods. A separate contractual clause or national law governs the passing of title.
• Be precise about multimodal use — Use the appropriate rule group for the transport mode. Sea-only rules should not be used for multimodal shipments because delivery points and obligations differ.

Limitations and scope:

• Incoterms do not govern payment terms, transfer of ownership, breach remedies, or consequences of late delivery beyond risk and cost allocation; these must be covered in other contract clauses.
• They do not replace applicable national or international carriage law, customs law, or insurance law; rather they interact with those regimes.

Example scenario:

Under CIF Shanghai Incoterms 2020 a seller in Hamburg contracts to deliver goods to Shanghai. The seller arranges carriage to Shanghai and contracts for minimum marine insurance covering the buyer’s interest. Risk transfers from seller to buyer when the goods are placed on board the vessel in Hamburg, but the seller bears cost of freight and insurance to Shanghai. If cargo is damaged during the sea voyage, the buyer can claim under the seller-obtained policy because the seller was required to procure insurance for the buyer’s benefit.

In Summary

Incoterms are indispensable tools for clarifying delivery responsibilities in international trade. When properly chosen and precisely specified in a sales contract, they reduce ambiguity, speed negotiations, and help allocate costs and risks in ways that reflect the parties’ commercial intent. Users should always cite the relevant Incoterms edition, define named places, and complement Incoterms with contractual clauses covering payment, title, insurance levels, and dispute resolution.