Introduction to Incoterms® Rules
This article is part of our weekly blog series on the Incoterms® Rules — we will be looking at a new term every Tuesday
International Commercial terms (“Incoterms®” for short) are a set of three-letter standard trade terms used in international contracts for the sale of goods. Incoterms are widely used in international and domestic commercial transactions, and are essential to understand prior to a shipment. Which terms you and your seller/buyer agree upon will define the responsibilities each party has for the delivery of goods under sales contracts.
To help importers and exporters fully understand the meaning of the various Incoterms, we are creating a series of blog posts to explain and illustrate how they affect your obligations regarding your shipments.
The most recent version of Incoterms® is Incoterms® 2020.* Incoterms® are separated into two groups and organized by mode of transport. Knowing these terms of sale will help you avoid any misunderstanding when preparing sales contracts and will clearly outline your obligations versus your buyer or seller’s obligations. When negotiating with your buyer or seller, pay close attention to when responsibility for certain transportation costs and risk of damage or loss passes from one party to the next. Incoterms are intended to reduce or remove uncertainties arising from different interpretations of the rules in different countries.
Incoterms® consists of a total of 11 trade terms, which are divided into two groups.
Group 1 consists of terms that can be used for any mode of transportation:
• EXW Ex Works
• FCA Free Carrier
• CPT Carriage Paid To
• CIP Carriage and Insurance Paid To
• DPU Delivered at Place Unloaded
• DAP Delivered at Place
• DDP Delivered Duty Paid
Group 2 consists of terms that apply to sea and inland waterway transport only:
• FAS Free Alongside Ship
• FOB Free on Board
• CFR Cost and Freight
• CIF Cost, Insurance, and Freight
The International Chamber of Commerce (ICC) has provided a very helpful illustration of Incoterms® that you can download here for free. It shows how in working down the list of incoterms, risk progressively changes from the buyer’s responsibility to the seller’s responsibility.
*Note that “Incoterms® 2010 is still in effect today” according to the ICC. The older version can be used for any contracts prior to the January 1, 2020 effective date of Incoterms 2020.
This blog series is intended to be a helpful introduction to international trade terms, not a comprehensive resource. C J International recognizes that the ICC is the only official source of definitions and explanations surrounding the Incoterms® Rules, and advises our clients and the shipping community to consult iccwbo.org and their educational materials for further details.
Incoterms® and the Incoterms® 2020 logo are trademarks of ICC. Use of these trademarks does not imply association with, approval of or sponsorship by ICC unless specifically stated above. The Incoterms® Rules are protected by copyright owned by ICC. Further information on the Incoterms® Rules may be obtained from the ICC website iccwbo.org.