A Beginner's Introduction to Incoterms® Rules
Mastering Incoterms® 2020
The Essential Infographic for Global Trade
Introduction: Why These Rules Matter
The Hook: Did you know that in many international sales, the seller completes their job and transfers all risk to the buyer the moment the goods leave the seller's factory—even if the buyer hasn't paid yet?
The Value: International trade relies on clear agreements. Incoterms® (INternational COmmercial TERMS), published by the ICC, act as a globally accepted dictionary. Mastering them allows you to clearly define responsibilities, accurately calculate costs, and minimize costly disputes.
Your Roadmap: We will cover four core themes:
- What Incoterms® Define (and What They Don't)
- The Triple Assignment: Cost, Risk, and Delivery
- A Brief History: Why the Rules Keep Changing
- The 11 Rules: Choosing the Right Term for Your Transport
1. The Scope of Incoterms®
Incoterms® are rules for interpreting B2B sale contracts, specifically defining who is responsible for transport arrangements. However, they are NOT the contract itself.
What They Define (The Core Three)
- Obligations: Who handles licenses, documents, and carriage.
- Risk: The exact point where risk of loss shifts (the "Delivery" point).
- Costs: Which party pays for specific expenses (loading, insurance, etc.).
What They Do NOT Cover (Crucial Limits)
- Transfer of Title/Ownership: Must be specified elsewhere.
- Payment Details: Method, timing, or currency.
- Breach & Remedies: Legal consequences for defective or non-conforming goods.
Case in Point: FOB defines risk transfer, but if goods are defective, the Incoterms® offer no legal remedy.
2. The Triple Assignment: Delivery, Risk, & Cost
The rules are structured to clearly divide three key responsibilities. "Delivery" is a legal term indicating the exact moment risk transfers from seller to buyer.
Cost Allocation Tip:
Costs incurred before the delivery point are the seller's; costs after are the buyer's. Incoterms® 2020 uses a clear consolidated section (A9/B9) in each rule for all costs.
The Four Categories of Delivery (Risk Transfer Point)
| Category | Letter | Key Delivery Point (Risk Transfers) | Seller's Obligation |
|---|---|---|---|
| Departure | E (EXW) | At the seller's premises, before loading. | Minimum (Buyer bears almost all risk/cost). |
| Main Carriage Unpaid | F (FCA, FAS, FOB) | When goods are handed to the buyer's carrier. | Mid-Range (Seller handles pre-shipment). |
| Main Carriage Paid | C (CPT, CIP, CFR, CIF) | When goods are handed to the seller's carrier (Risk shifts early). | Mid-Range (Seller pays freight later). |
| Arrival | D (DAP, DPU, DDP) | At the destination country, late in the transport cycle. | Maximum (Seller bears almost all risk/cost). |
3. Modernizing the Rules: Incoterms® 2020
First published in 1936, the rules are updated periodically (most recently in 2020) to reflect evolving global transport methods like containerization and multimodal shipping.
The FOB vs. FCA Dilemma (Actionable Advice)
Practical Tip: Avoid common mistakes!
FOB (Free On Board) is a traditional maritime rule, requiring goods to be placed *on board* the vessel. If you ship modern, containerized goods, the seller usually hands them over at an inland terminal.
Actionable Advice: The ICC recommends using FCA (Free Carrier) for most containerized shipments, as it is designed for any mode of transport and reflects the true handover point at the terminal.
Key Changes in Incoterms® 2020
- DPU: DAT (Delivered at Terminal) was renamed to DPU (Delivered at Place Unloaded). This clarifies that delivery can be *any* agreed place, as long as the seller handles the unloading.
- FCA & Bills of Lading: An optional mechanism was added allowing the buyer to instruct their carrier to issue an on-board Bill of Lading to the seller, addressing Letter of Credit payment needs.
- Insurance: CIP (Carriage and Insurance Paid To) now requires the highest level of insurance coverage (Institute Cargo Clauses (A)). CIF (Cost Insurance and Freight) retained the lower minimum (Clause (C)).
4. The 11 Rules: Choosing the Right Transport Group
The 11 rules are strictly categorized to match the transport method used. Choosing the wrong group can create risk gaps.
Group I: Any Mode(s) of Transport (Multimodal)
EXW, FCA, CPT, CIP, DAP, DPU, DDP
Use when transport involves trucks, rail, air, or a combination (multimodal). This is the safe choice for containerized goods.
Group II: Sea and Inland Waterway Transport
FAS, FOB, CFR, CIF
Should ONLY be used for sea or river transport where the seller handles placing the goods *alongside* (FAS) or *on board* (FOB, CFR, CIF) the vessel.
The Naming Convention (Actionable Advice)
To use an Incoterm® effectively, you must always cite three things:
"[Rule] [Named Location] Incoterms® [Year]"
Example: "CIF Port of Rotterdam Incoterms® 2020". Be as geographically specific as possible to prevent disputes.
Frequently Asked Questions (FAQ)
Q: If a seller ships goods under CIF terms, and the ship sinks, must the seller send replacements?
A: No. Under CIF ("Cost, Insurance, and Freight"), the risk of loss transfers to the buyer when the goods are loaded on board the vessel. The seller has fulfilled their obligation to "deliver," regardless of whether the goods arrive safely.
Q: What essential legal rights are NOT covered by Incoterms®?
A: They do not deal with the transfer of title, ownership, or property rights in the goods sold. They also do not provide remedies for contract breaches or determine the applicable law.
Q: Why is FCA preferred over FOB for containerized goods?
A: FOB is for traditional sea transport where goods are physically placed on board the vessel. Containerized goods are usually handed over at an inland terminal. FCA (Free Carrier) is a multi-modal rule that accurately reflects delivery when the goods are handed over to the carrier at any named place.
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