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The Origin of Incoterms

Differences in trading practices and legal interpretations between traders of different

countries necessitated a common set of rules. These rules had to be easy for all participants
to prevent misunderstandings, disputes and litigation.

Incoterms (International Commercial Terms) were first conceived by the International

Chamber of Commerce (ICC) in 1921, and the first Incoterms rules were created in 1936.
They were officially designated as Incoterms in 1936. Since then, Incoterms have evolved
into a codified worldwide contractual standard. They are periodically updated when
international trade events require attention. Amendments and additions were made in 1953,
1967, 1976, 1980, 2000, 2010 and 2020.

Incoterms are a voluntary, authoritative, globally-accepted and adhered-to text for

determining the responsibilities of buyers and sellers for the delivery of goods under sales
contracts for international trade. Incoterms closely correspond to the U.N. Convention on
Contracts for the International Sales of Goods (CISG). Incoterms are known and
implemented by all major trading nations.

When a seller and a buyer agree to employ a particular Incoterm, each accepts the
corresponding obligations and responsibilities as clearly set forth and defined under that
particular Incoterm. Incoterms reduce the risk of legal complications by giving buyers and
sellers a single legal base.

Incoterms are only part of the whole sales contract. They don’t say anything about the price
to be paid, when payment will be made or the method of payment that will be used in the
transaction. Furthermore, Incoterms rules don’t deal with the transfer of ownership of the
goods, breach of contract or product liability; all of these issues need to be considered in the
contract of sale. Also, Incoterms rules can’t override any local country laws.

It is possible to add extra words to an Incoterms rule, so as to cater for special situations
and/or to achieve more precise definition of obligations.

Incoterms 2020 marks the first update since 2010 to keep pace with the continually evolving
global trading landscape. The latest version of the rules came into effect on 1st January
2020.

All contracts made under Incoterms 2010, Incoterms 2000 and any other previous editions
remain valid and parties to a contract for the sale of goods can agree to choose any version
of the Incoterms rules. It is important to clearly specify the chosen version and make sure
your documentation is correct throughout the transaction.

If the contract referred only to Incoterms rules but not to a specific year, then the Incoterms
rules version in force at that time of contracting would most likely be applied in the event of
a dispute. Best practice is always to refer to the most recent revision, e.g. Incoterms 2020.
Introduction to Incoterms 2020

The most current revision of the terms, Incoterms 2020, consists of 11 Incoterms.

Because each of the different Incoterms identify the responsibilities of the seller and the
buyer in the transaction at different points in the shipping journey, certain Incoterms work
better for certain modes of transportation.

Incoterms for Any Mode of Transport include:

EXW
FCA
CPT
CIP
DAP
DPU
DDP

Incoterms for Sea and Inland Waterway Transport include:

FAS
FOB
CFR
CIF

When the seller and the buyer agree upon the appropriate Incoterms 2020 rule they wish to
use for their transaction, it's important they include the chosen term in their sales contract,
purchase order, commercial invoices, and other documents. The documents should state the
chosen Incoterm followed by the named port, place or point and which set of Incoterms
rules they are using.

Here are two examples:

CIF, Shanghai, Based on Incoterms® 2020 Rules.

DAP, No. 123, ABC Street, Importland, Based on Incoterms® 2020 Rules.
Incoterms for Any Mode of Transport
EXW (Ex Works)
EXW is most favourable to the seller.
The seller fulfills its obligations by having the goods available for the buyer to pick up at its
premises or another named place (i.e. factory, warehouse, etc.). With EXW, the buyer bears
all risk and costs starting when it picks up the products at the seller’s location or other
named place until the products are delivered to its location. Seller has no obligation to load
the goods, to clear them for export, to cover transportation costs once the goods have left the
premises.
While EXW is the only Incoterm that makes export clearance the responsibility of the
buyer, keep in mind that under national laws it is sometimes impossible to make a foreign
entity deal with customs formalities. For example, under the Customs Code of the Eurasian
Economic Union a foreign importer cannot act as a declarant of the goods if they leave the
customs union under a contract with a local company.
FCA (Free Carrier)
The seller is responsible for either making the goods available at its own premises or at a
named place. In either case, the seller is responsible for loading the goods on the buyer's
transport and is responsible for delivery to the port and export clearance including security
requirements.
Risk transfers once the goods are loaded on the buyer’s transport. Thus, any damage to the
goods when they are on board the vessel or in a truck, or train, or plain is the responsibility
of the buyer.
The buyer pays the cost of carriage or freight, bill of lading fees and insurance. Also, he
pays for unloading and transportation costs to the final destination.

This term has changed the most in the Incoterms 2020. Previously, problems occurred with
this term when the seller was responsible for loading the goods on a truck or some other
transport hired by the buyer and not directly on the international carrier. If the seller and
buyer had agreed on using a letter of credit as the payment method for this transaction,
banks often require the seller to present a bill of lading with an on-board notation before
they can get paid.
An international carrier won't typically provide a seller who did not present the goods
directly to them with such a bill of lading. Under the new Incoterms 2020, FCA allows the
parties to agree in the sales contract that the buyer should instruct its carrier to issue a bill of
lading with the on-board notation to the seller.
CPT (Carriage Paid To)
CPT requires the seller to clear the goods for exportation and arrange for carriage (by one or
more transport modes) to the named place of destination. The seller does not need to obtain
or pay for insurance.
Under CPT rules, the seller’s risk ends, and the buyer’s risk begins, when the first carrier
receives the goods from the seller. However, the buyer is only responsible for additional
costs after the goods arrive at the final destination. As all other carriage terms this term has
two critical points, because risk passes and costs are transferred at different places.
A carrier is any person or company who undertakes the carriage of the goods, such as a
shipping line, airline, trucking company, railway or freight forwarder. In multimodal
shipments, the place of shipment is the first carrier used.
CIP (Carriage and Insurance Paid To)
CIP is broadly similar to CPT. However, the seller is required to insure the goods in transit.
In one of the most significant changes under Incoterms 2020, CIP requires the seller to
purchase a higher level of insurance: 110% of the contract value under Institute Cargo
Clauses (A) of the Institute of London Underwriters. Previously the minimum insurance was
applicable under Institute Cargo Clauses (C).
The seller shall contract for the carriage and pay its costs. The seller shall clear the goods
for export and deliver them to the carrier. The risk is transferred to the buyer at the defined
place of shipment. However, the seller is responsible for the transportation costs of the items
to the designated place of destination. As all other carriage terms this term has two critical
points, because risk passes and costs are transferred at different places.
Institute Cargo Clauses are attached to a type of marine
insurance that covers cargo in transit. These clauses are to specify
what items in the cargo are covered should there be damage or
loss to the shipment. Institute Cargo Clauses can cover everything
from the cargo itself to the container that holds it to the mode of
transportation used to ship it. There are three basic sets of institute
cargo clauses; A, B, C. The “A” Clauses are commonly referred to
trade as “all risks” coverage, while Clauses “B” and “C” indicate a
lower level of coverage and a greater number of exclusions.

Read the layout of the Institute Cargo Clauses, mark the risks covered and translate them in
your native language.

Risks A B C
Loss of or damage to the subject-matter insured reasonably attributable to:

fire or explosion TRANSLATION

vessel or craft being stranded grounded sunk or capsized TRANSLATION

overturning or derailment of land conveyance TRANSLATION

collision or contact of vessel craft or conveyance with any external object other
than water TRANSLATION
discharge of cargo at a port of distress TRANSLATION

earthquake volcanic eruption or lightning TRANSLATION

Loss of or damage to the subject-matter insured caused by:

general average sacrifice TRANSLATION

jettison TRANSLATION

washing overboard TRANSLATION

entry of sea lake or river water into vessel craft hold conveyance container or
place of storage TRANSLATION
Total loss of any package lost overboard or dropped whilst loading on to,
or unloading from, vessel or craft.

DAP (Delivered at Place)

Seller clears the goods for export and bears all risks and costs associated with delivering the
goods to the named foreign destination not unloaded. DAP means the buyer is responsible
for all costs and risks associated with unloading the goods and customs clearance for
importation of the goods into the country of destination.
DPU (Delivered at Place Unloaded)
The most obvious change from Incoterms 2010 is renaming the term Delivered at Terminal
(DAT) to Delivered at Place Unloaded (DPU). This name change underlines the fact that
delivery can happen anywhere, and not just at a transport “terminal”. As with DAT, this is
the only rule that requires the seller to unload the goods at their destination.
DPU is very similar to DAP except that the seller must pay for unloading the goods. Like
DAP, the seller clears the goods for export and bears all risks and costs associated with
delivering the goods to the named place, which can be a port or other named location in the
foreign destination. Buyer is responsible for all costs and risks from this point forward
including clearing the goods for import at the named country of destination.
DDP (Delivered Duty Paid)
DDP places the maximum obligation on the seller. This rule means that the seller bears all
risks and costs associated with delivering the goods to the named place of destination ready
for unloading and cleared for import.
DDP is the only rule that requires the seller to take responsibility for import clearance and
payment of taxes and/or import duty. These last requirements can be highly problematical
for the seller. Keep in mind that under national laws it is sometimes impossible to make a
foreign entity deal with customs formalities. For example, under the Customs Code of the
Eurasian Economic Union a foreign exporter cannot act as a declarant of the goods if they
enter the customs union under a contract with a local company.
 EXW DAP DPU DDP
Suitable means of transport ALL ALL ALL ALL

Who is responsible for packing and S S S S

marking of the goods?
Who is responsible for export B S S S
clearance?
Who is responsible for loading of the B S S S
goods?
Who shall pay for carriage or freight? B S S S

Who shall insure the goods? And on B B B B

which terms?
Who is responsible for import B B B S
clearance?
Who is responsible for unloading the B B S B
goods aboard the ship?
What is the point of passage of risk? Seller’s location point of destination point of destination point of destination

What is the point of transfer of costs? Seller’s location point of destination point of destination point of destination

Which term should be used instead of EXW if the buyer cannot obtain export clearance?

Which term should be used instead of DDP if the seller cannot obtain import clearance?
Incoterms for Sea and Inland Waterway Transport
FAS (Free Alongside Ship)
The seller must arrange for the goods to be delivered next to a particular vessel in a
particular port in order to be ready for transfer to a waiting ship within reach of the
ship's lifting tackle.
The seller is responsible for export clearance. The buyer is responsible for the costs
of re-loading of the goods, ocean transportation, and insurance.
FAS should be used only for non-containerised sea freight and inland waterway
transport. Containerised goods should be delivered under FCA.
FOB (Free on Board)
Under FOB terms, the seller bears costs and risks until the goods are loaded on board
of the designated vessel. Any damage to the goods when on board the vessel is the
responsibility of the buyer.
The seller’s responsibility includes arranging export clearance. At the same time, the
buyer pays the cost of marine freight, bill of lading fees and insurance. He is also
responsible for unloading and local transportation costs from the port of arrival to the
final destination.
FOB should be used only for non-containerised sea freight and inland waterway
transport. Containerised goods should be delivered under FCA.
CFR (Cost and Freight)
This term sounds a lot like CPT rule, but it can only be used for sea and inland
waterway transport.
The seller pays for export clearance and freight costs to the selected port. The buyer
assumes risk once the goods are loaded aboard the vessel. However, the seller is
responsible for the transportation costs of the items to the designated place of
destination. Buyer is responsible for all costs associated with unloading the goods at
the named port of destination and clearing goods for import.
As all other carriage terms this term has two critical points, because risk passes and
costs are transferred at different places.
CFR should be used only for non-containerised sea freight and inland waterway
transport. Containerised goods should be delivered under CPT.
CIF (Cost, Insurance and Freight)
This term sounds a lot like CIP rule, but it can only be used for sea and inland
waterway transport.
CIF is broadly similar to CFR. However, the seller is required to insure the goods in
transit.
The seller pays for export clearance and freight costs to the selected port. The seller is
also required to purchase the minimum level of insurance under Clause C of the
Institute Cargo Clauses. This requirement is unchanged from Incoterms 2010.
Risk passes from seller to buyer once the goods are on board the vessel at the port of
shipment. However, the seller is responsible for the transportation costs of the items
to the designated place of destination. Buyer is responsible for all costs associated
with unloading the goods at the named port of destination and clearing goods for
import.
As all other carriage terms this term has two critical points, because risk passes and
costs are transferred at different places.
CIF should be used only for non-containerised sea freight and inland waterway
transport. Containerised goods should be delivered under CIP.
Case 1
A buyer on an Ex-Works contract sends a truck to pick up the goods at the exporter's
factory. The goods are loaded into the truck, which crashes before leaving the
factory. The goods are damaged. Who is responsible?

Case 2
A buyer agrees to an FAS contract and books a vessel to pick up the goods. The
vessel is delayed and extra costs are incurred while the goods are waiting for the
vessel. Who pays the extra costs? B

Case 3
Heavy machine tools are being shipped FOB Liverpool. They are being loaded onto
the ship and the rope breaks. The goods finish up at the bottom of the dock and divers
are sent down. The recovery, and repair of the goods costs a great deal of money.
Who pays and why? SELLER

Case 4
A shipment of fresh flowers is transported to the docks by an exporter on an FOB
contract. The flowers are crushed by a crane falling across them as they are waiting to
be loaded on board. Who is responsible?
SELLER
 FAS FOB CFR CIF
Suitable means of transport Water Water Water Water

Who is responsible for packing and S S S S

marking of the goods?
Who is responsible for export S S S S
clearance?
Who is responsible for loading the B S S S
goods aboard the ship?
Who shall pay for freight? B B S S

Who shall insure the goods? B B B S

Who is responsible for import B B B B

clearance?
Who is responsible for unloading the B B B B
goods aboard the ship?
What is the point of passage of risk? goods are placed Aboard the ship when the goods are when the goods are
alongside ship. placed aboard the placed aboard the
vessel. vessel.
What is the point of transfer of costs? goods are placed Aboard the ship when the goods when the goods
alongside ship. reach the point of reach the point of
destination. destination.
Which rule is more suitable for FCA FCA CPT CIP
delivery in containers?
 CPT CIP CFR CIF
Suitable means of transport ALL ALL Water way Water way
transport transport
Who is responsible for packing and S S S S
marking of the goods?
Who is responsible for export S S S S
clearance?
Who is responsible for loading of the S S S S
goods?
Who shall pay for carriage or freight? S S S S

Who shall insure the goods? And on B S B S

which terms? Clause A Clause C
Who is responsible for import B B B B
clearance?
Who is responsible for unloading the B B B B
goods aboard the ship?
What is the point of passage of risk? First carrier First carrier Aboard the ship Aboard the ship

What is the point of transfer of costs?

The point of The point of The point of The point of
destination destination destination destination
Is the rule suitable for delivery in + + CPT CIP
containers?