Incoterms®: what you should know

Incoterms® (International Commercial Terms) are international terms of trade that govern the responsibilities of the parties to a contract when importing and exporting goods. Incoterms® are published by the International Chamber of Commerce (ICC). The first Incoterms® rules were introduced in 1936. Ever since, the ICC maintains and develops the rules, the latest publication being Incoterms® 2020.

Scope and Limitations of Incoterms

Incoterms® enjoy worldwide acceptance as a uniform set of rules defining the obligations of buyers and sellers under Incoterms 2020, risks and costs associated with movement of the goods. While extensively used in purchase and sales contracts, Incoterms® have their own limitations in application. The terms apply to the delivery of the goods only and do not govern other contractual rights and obligations between buyer and seller.

It is also good to know that Incoterms® have nothing to do with the contract of carriage or forwarding agreement between the shipper and the carrier or the shipper and the forwarder. For instance, when you make a rate request for shipment from Singapore to Frankfurt under “CIP Frankfurt", you should know that your forwarder or the carrier will not provide cargo insurance responsibilities under Incoterms just because the Incoterms® CIP requires the goods to be insured by the shipper. This is because the carrier or the forwarder you may be using are not parties to the sales contract (between buyer and seller) which means Incoterms® do not apply to them. The responsibilities of the carrier or the forwarder before the shipper or the consignee of the goods should be defined in the contract of carriage or forwarding agreement.

Incoterms 2020

Incoterms® 2020 international shipping rules, which became effective on January 1, 2020, is the ninth set of the terms published by the ICC. As in the previous version, it contains 11 terms divided into two main categories: Incoterms® rules for any mode of transport and Incoterms® 2020 rules for sea and inland waterway transport. It is good to remember that the publication of a new version of Incoterms® does not mean you cannot use the previous versions. Important is that the parties to the contract agree to use the same set of the terms when making a contract.

Rules for Any Mode of Transport

EXW | Ex Works

Ex Works is used when the seller places the goods at the buyer’s disposal on its territory or at another location specified in the contract, such as a factory, warehouse, etc. The entire responsibility for transportation is on the buyer.

FCA | Free Carrier

The seller hands over the goods to the carrier or other designated person in the seller’s territory or at another contractual place. Responsibility for the goods passes to the buyer after the goods are delivered by the seller to the specified place.

CPT | Carriage Paid To

The seller hands over the goods to the carrier or to another person designated by the seller at an agreed place. The seller enters into a contract with the carrier and pays all transport costs necessary for the delivery of the goods to destination.

CIP | Carriage and Insurance Paid To

The seller has the same obligations as in the CPT, but additionally concludes a contract to insure the goods against the risks of loss and/or damage during carriage. Under CIP, cargo is normally insured with minimum coverage, unless otherwise agreed in the contract between seller and buyer.

DAP | Delivered at Place

In DAP delivery of the goods is completed by the seller to the specified destination and is at the buyer’s disposal after loading on the incoming vehicle. All potential risks and costs of transportation are borne by the seller.

DPU | Delivered at Place Unloaded

In DPU, the seller delivers when the goods after unloading are placed at the buyer’s disposal at the specified place of destination. Similarly to DAP, liability for risks and transportation costs rests with the seller.

DDP | Delivered Duty Paid

The seller delivers and hands over the goods to the buyer at a determined place and pays all export and import costs, as well as all necessary documents for customs procedures.

Rules for Sea and Inland Waterway Transport

FAS | Free Alongside Ship

The seller delivers the goods to the place specified by the buyer near the ship (for example, on a pier or barge) at the designated port of shipment. The risk of loss and/or damage to the goods, as well as all costs, passes to the buyer, from the time the goods are delivered to the place next to the ship.

FOB | Free On Board

The seller brings the goods on board the vessel at the designated port of shipment. The risk of loss and/or damage passes from the seller to the buyer when the goods have already been loaded on board the ship.

CFR | Cost and Freight

The seller brings the goods on board the vessel and is responsible for the risk of loss and/or damage to the goods before being brought on board. The seller must conclude the contract and pay the costs and freight necessary to deliver the goods to the port of destination.

CIF | Cost Insurance and Freight

As with the CFR, the seller alone brings the goods on board the ship, concludes the contract and pays the freight. In addition, the seller concludes a contract to insure the goods against the risk of loss and/or damage during carriage.

What is the difference between Incoterms® 2020 and Incoterms® 2010?

The International Chamber of Commerce (ICC), which develops Incoterms®, updates them roughly every ten years to reflect evolving global trade practices. The latest update in 2020 introduced minor but important changes to improve clarity and risk allocation.

Key updates in Incoterms 2020 include:

• FCA (Free Carrier): Updated guidance on bill of lading liability

• Insurance changes: New rules for seller-provided insurance under CIF and CIP

• DAT renamed to DPU: Delivered at Place Unloaded

• Enhanced transport safety requirements: Specific provisions added for each Incoterms®

• Flexibility in transport modes: Parties may now use their own transport means where applicable

These updates ensure Incoterms® remain practical and aligned with modern global shipping contracts and logistics requirements.

How we can help you

Our team at Delta Global Solutions is well versed in the ways international trade works. Beyond the standard freight forwarding services, we help our customers with their purchasing process, from drafting and legal scrutiny of sales contracts to global sourcing of commodities, materials and parts to support uninterrupted operations of our customers’ facilities. Contact Delta Global Solutions today to simplify your international trade and logistics. Our experts are ready to support your sourcing, contracts and global freight needs, ensuring your supply chain runs smoothly and without interruption.

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FAQ:

1. Should companies always use Incoterms® 2020, or are previous versions still valid?

While Incoterms® 2020 is the latest edition, businesses can still use Incoterms® 2010 or earlier versions as long as both parties clearly agree on the chosen rules. It is essential to specify the edition in the sales contract to avoid confusion in international logistics.

2. Is the use of Incoterms® mandatory, or voluntary?

Many businesses mistakenly believe that Incoterms® are mandatory or legally binding. In reality, they are not required by law. However, using Incoterms® in international sales contracts is strongly recommended because they help prevent misunderstandings between buyers and sellers.

When applying Incoterms®, it is crucial to clearly state the version of the rules in the sales contract. If the contract only lists the Incoterms® without specifying the edition, the Incoterms® 2020 rules will apply by default. For contracts signed before January 1, 2020, the Incoterms® 2010 version (or whichever edition was in force at the time) would still apply.

To ensure accuracy and avoid disputes, the proper way to reference Incoterms® is to include the rule, the place of delivery or port of destination, and the exact location. For example, instead of simply writing "DAP Tashkent" the contract should specify the full delivery details such as the warehouse address, plant name or even the unloading bay number.

3. Which Incoterms® are more commonly used or less used and why?

There are two most commonly misused Incoterms®:

• Ex Works (EXW): Under this rule, the seller only makes the goods available at their warehouse or facility, without any obligation to load them onto the buyer’s transport. Misunderstandings often occur when buyers assume the seller is responsible for loading. In such cases, Free Carrier (FCA) is the correct Incoterm to use, as it requires the seller to load the goods onto the buyer’s transport or deliver them to a named location, ready for unloading by the buyer.

• Free on Board (FOB): A frequent mistake among new exporters is using FOB. Since FOB is a maritime-only Incoterm, it can only apply when goods are delivered onto a vessel at a named port of departure. Delivery is considered complete once the cargo is physically on board the ship.

4. What is not covered by Incoterms®?

Although Incoterms® define the responsibilities of buyers and sellers in international trade, they do not regulate certain key aspects of a sales contract, such as:

• The price of the goods

• The type or description of the goods being sold

• The time, place, method, or currency of payment

5. Why are Incoterms® essential in international trade?

In global commerce, Incoterms® play a critical role by offering multiple advantages:

• Standardization: Incoterms® create a common framework for international shipping agreements, reducing the risk of misunderstandings and costly disputes between trading partners

• Clear allocation of responsibilities: They define who manages key tasks such as transportation, cargo insurance, customs clearance, duties and taxes and the exact point when risk shifts from seller to buyer

• Improved efficiency: By setting clear expectations in the sales contract, Incoterms® streamline cross-border transactions, ensuring smoother logistics and stronger supply chain reliability