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I. Introduction
A. What is incoterms
Incoterms or International Commercial Terms are a series of pre-defined rules, of
voluntary use, relating to international commercial law. They describe the conditions to
which seller and buyer of goods agree (who is responsible/pays for what) for the
international sale and supply of those goods.

Incoterms were created by the International Chamber of Commerce (ICC) in 1936

and thanks to their usefulness they were rapidly used in all the world. Nowadays
Incoterms are accepted internationally by governments and public administrations,
although, as we’ll see later, they have been updated since their conception.
B. Their importance in international trade
The main advantage of Incoterms is the standardized terminology used by all
companies doing international business. Specific terms or acronyms provide both carriers
and buyers with clear rules, helping to avoid confusion about each party’s responsibilities
and cost management.
Incoterms, widely-used terms of sale, are a set of 11 internationally recognized
rules which define the responsibilities of sellers and buyers. Incoterms specify who is
responsible for paying for and managing the shipment, insurance, documentation,
customs clearance, and other logistical activities.

II. History of Incoterms

A. A brief history of the Incoterms.
The FOB Incoterm was the first Incoterm to be created. And even though its origin
traces back over more than two centuries, Incoterms as they are now weren’t actually
created until 1936 by the International Chamber of Commerce (ICC).
Since then, the international transportation community has gone through many
changes. To adapt, there have been new and improved editions of the Incoterms like the
ones introduced in 1953, 1967, and 1976.
But over the past five decades, revisions have been implemented at the turn of
every decade and tend to stay in effect for the entire decade, such as Incoterms 1980,
1990, 2000, and 2010.
The importance of Incoterms and how they facilitate world trade cannot be denied.
When Incoterms were first introduced, they applied only to 13 countries. Eight revisions

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later, they are now widely used in over 140 countries and can be found in 31 different
languages.Mention when and why they were first introduced (e.g., to standardize
international trade practices).

B. Difference between Incoterm 2010 and 2020.

There are two key changes in incoterms® 2020 compared to the 2010 edition:

 DAT (Delivered at Terminal) is renamed Delivered at Place Unloaded (DPU)

 FCA (Free Carrier) now allows or Bills of Lading to be issued after loading
Other changes include:
 CIF (Cost, Insurance and Freight) and CIP (Carriage and Insurance Paid To) set
out new standard insurance arrangements, but the level of insurance continues to
be negotiable between buyer and seller.
 Where listed, cost allocation between buyer and seller is stated more precisely -
one article lists all costs the seller and the buyer are responsible for.
 FCA (Free Carrier), DAP (Delivered at Place), DPU (Delivered at Place
Unloaded) and DDP (Delivered Duty Paid) now take account of buyer and seller
arranging their own transport rather than using a third party.
 Security-related obligations are now more prominent.n“Explanatory Notes or
Users” or each Incoterm® have replaced the 2010 edion’s Guidance Notes, and are
designed to be easier for users.
 CIP now requires as default insurance coverage ICC A or equivalent. It was ICC C
under Incoterms® 2010. Required insurance coverage under CIF remains.

III. The Purpose of Incoterms

Every international shipment involves multiple steps, costs, changes in ownership,
and risks for both importers and exporters. Navigating these variables is a critical part of
supply chain management. If it is uncertain which party is contracting transportation or
providing cargo insurance, for instance, a shipment could be delayed, damaged, or lost
without a clear indication of responsibility. As your freight claims management experts,
we're here to help you navigate these complexities.
Thankfully, there are standard terms that clarify the roles and responsibilities,
A. Clarify Responsibilities:
 Carriage
Deciding how a shipment will get from point A to point B can seem like a fairly basic
task. However, an international shipment can have several legs to its journey, and the

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Incoterm will determine exactly how far the seller will deliver the shipment before the
buyer assumes responsibility. Any transport after that will be the responsibility of the
buyer.
 Cost
International transportation costs can vary significantly depending on lane and mode. The
Incoterm on a shipment will not only determine who arranges the transportation but also
who is responsible for payment and how it is reflected in the overall transaction.
Transportation fees are included in the invoice value of the goods, and can often be
deducted for duty and tax benefits.
 Risk
With many legs to a journey come many points of risk. If a shipment is lost or damaged
along the route, it is critical to understand which party bears the risk. The agreed-upon
Incoterm will do just that, making the process to a resolution much more streamlined.
B. Reduce Misunderstandings and Disputes
 Common Language:
Incoterms provide a universal and standardized language for discussing international
trade contracts. This common terminology helps ensure that both parties have a shared
understanding of their roles and obligations.
 Preventing Ambiguity:
Without Incoterms, the same contract clause might be interpreted differently by parties
from different countries, leading to disagreements.
 Clear Guidelines:
Incoterms offer clear and predefined guidelines for allocating costs, risks, and logistical
responsibilities. This clarity helps prevent disputes and disagreements that can arise from
vague or incomplete contracts.

IV. The Structure of an Incoterm

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The 11 Incoterms are organized into four different categories designated by the first letter
in their abbreviation. These categories are:

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 Category E
There is only one Incoterms in Category E and that is the EXW (Ex Works) term. This
term gives the buyers most of the responsibility for overseeing the import process.

 EXW - Ex Works
Seller Responsibility: The seller packs and makes the shipment available at specified
place (i.e. the works, factory, warehouse, etc.). for transporting
Buyer Responsibility: The buyer takes the goods onto a vehicle, and oversees all export
procedures for shipment and transport to desired destination.
Things to Note: Operational difficulties in cross-border transactions. Based on your
relationship with the seller, there may be an unofficial option wherein the shipper may
assist with the loading of the goods onto your vehicle, etc. There is also an official option
wherein you can include the words “LOADED” to the term EXW so that the seller may
extend his service to assist with the loading operations.
→ The seller has minimal obligations, risks & costs whereas the buyer has all the
risks and obligations.S

Category F
Category F Incoterms gives the seller responsibility for overseeing the delivery of the
goods to the buyer. The seller must use a delivery method the buyer wants them to use.
After the goods have been delivered, the buyer then becomes responsible for the related
costs and risks.
Category F has three Incoterms:
 Free Carrier (FCA).
 Free Alongside Ship (FAS)
 Free on Board (FOB)
 FCA - Free Carrier
Seller Responsibility: In an FCA transaction, the seller could be involved in the actual
movement of the cargo up to a certain point. (This point could be the warehouse of the
carrier, the port or a terminal in the port or any other location agreed between the buyer
and seller.) The seller must take care of all pre-export documentation relating to the

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shipment such as port, customs, transport documentation till the point of delivery and
loading formalities if the delivery point is agreed to be the seller’s warehouse/premises
Buyer Responsibility: After the buyer has taken the delivered goods, the buyer must
take care of transporting the goods from the point of delivery by the seller till cargo
reaches the destination and the clearance of the goods at destination or any
movement/risk till the final point of rest. This could include the ocean leg as well which
includes negotiating the rates with the shipping lines
Things to Note:
 In the case of FCA the seller’s obligations, risks and costs are till the agreed point
of delivery, and the buyer’s obligations, risks and costs start from that agreed point
of delivery.
 Once the supplier has delivered goods to be "accepted" for shipment, the buyer
assumes all risk henceforth from the pre-decided location where shipment changes
hands.
Advantages: FCA can be applicable for all transport modes, including multiple ones. The
flexibility of the rules makes it suitable for various situations when the buyer arranges the
main carriage. When a buyer arranges for the main carriage of container goods, FCA is
the way to go.
 FAS - Free Alongside Ship
Seller Responsibility: The seller is required to handle all activities till the cargo is
delivered alongside the ship.
Shipper Responsibility: Handle the export clearance formalities for shipment; Pay for
the transportation from his door to the agreed port, terminal, quay or ship; Enter into
relevant contracts of carriage with the various carriers including any pre-carriages
applicable up to the agreed port, terminal, quay or ship; Take care of any and all export
permits, quotas, special documentation, etc. relating to the cargo; Cover all risk up to the
agreed point of delivery; Seller may also be requested to assist the buyer to secure a
transport document indicating the delivery, at the buyer’s risk and expense.
Buyer Responsibility: In a FAS transaction, the buyer needs to take over all obligations
from that point of delivery including: Organize suitable contract of carriage with the most
suitable carrier; The loading of the goods on the ship; All cargo handling charges at
origin; Arranging agents at the origin where it is required to handle loading requirements.
Things to Note:
 The FAS term is more suitable for non-containerized cargo because, in a
containerized shipment, the containers cannot be delivered alongside the ship but
rather at a container terminal.
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  This is best suited only for shipments which are transported by sea or inland
waterways. Suppliers are usually restricted to use this rule when they have direct
access to the vessel for loading
Advantages: Bulk cargo or non-container based goods are best suited for FAS.
 FOB - Free On Board
Seller Responsibility: In FOB, the seller has an obligation to deliver the goods on board
the ship. Similar to FAS as the seller needs to pay for the transportation, take care of any
and all export permits, quotas, etc. However, unlike FAS, the seller needs to get it loaded
instead of just getting it alongside into the vessel at the port upon which the risk is
transferred to the buyer.
Buyer Responsibility: The buyer needs to take over all obligations from that point of
delivery, including nominating the correct type of ship for the loading of the cargo and
organizing suitable contract of carriage with the most suitable carrier
Things to Note: Suited only when goods are transported by sea or inland waterways.
Suppliers are usually restricted to use this rule when they have direct access to the vessel.
When shipping containerized goods, FOB is often the best choice, as it shifts liability and
responsibility to the buyer once the container is sealed at origin. FAS, on the other hand,
is typically used when shipping bulk commodities that cannot be loaded into a shipping
container.

Category C
For Incoterms in Category C, the seller bears costs and risks associated with getting the
goods to the port where they will be loaded and shipped off. When the goods are loaded
onto the transport vehicle, the seller is free of any responsibility.
Responsibility at this point of the importing process is transferred to the buyer. There are
a total of four Incoterms within Category C which are:
 Cost and Freight (CFR)
 Cost, Insurance and Freight (CIF)
 Carriage Paid To (CPT)
 Carriage and Insurance Paid To (CIP)

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  CFR - Cost and Freight
Seller Responsibility: Supplier is supposed to completely oversee the transport of goods
from the warehouse to the destination port, "including the costs" along with delivering
the goods, clearing it for export and loading it to the vessel.
Buyer Responsibility: Any transport movement past the agreed place of destination
including on-carriage etc; The risk from the time the seller delivers the cargo on board to
the ship; Any and all import permits, quotas, special documentation, etc. relating to the
cargo; Import customs clearance and all related formalities
Things to Note:
 There is a clear difference between a liner trade and a tramp trade. CFR is only for
transport by waterways and does not include other modes of transport.
 It is crucial in a CFR transaction, the “risk” passes from seller to buyer once the
seller delivers the cargo onboard the performing vessel, whereas the costs up to the
named destination will still be for the seller.
 Suppliers would not be required to cover the shipment with marine insurance
against loss or damage.

 CIF - Cost, Insurance & Freight

Seller Responsibility: The seller responsibilities are the same as that of CFR and the
seller is also responsible for the cost of insuring the shipment (The insurance cover
secured by the seller should be equal to the commercial value of the product as agreed in
the contract of sale + 10%, which is to cover the average profit that the buyer may make).
Since this term requires minimal cover, many commercial roadblocks may arise.
Buyer Responsibility: Once on-board, the buyer assumes all the risk (and costs) - before
the main carriage takes place.
Things to Note:
 This rule is to be used only for sea or inland waterway transport.
 The risk of loss or damage to the goods passes when the goods are on board the
vessel. The seller must contract for and pay the costs and freight necessary to bring
the goods to the named port of destination.
 It is crucial in a CIF transaction, the “risk” passes from seller to buyer once the
seller delivers the cargo onboard the performing vessel, whereas the costs up to the
named destination will still be for the seller.

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  CPT - Carriage Paid To...
Seller Responsibility:
 The seller delivers the goods to a carrier, or a person nominated by the seller, at a
destination jointly agreed upon by the seller and buyer.
 The seller need to do the export clearance formalities; pay for the transportation
from his door to the named and agreed destination and enter into the relevant
contract of carriage with the various carriers; take care of any and all export
permits, quotas, special documentation, etc relating to the cargo
Buyer Responsibility:
 Same as CFR and The full cargo insurance portion from origin to destination;
 In CPT, once the seller hands over the goods to the road carrier for further
movement, the “risk” transfers from the seller to the buyer, but the cost of the
movement till the point of destination still remains with the seller. The customer
should pay for insuring the goods. Upon shipment, the buyer needs to take
responsibility and unload the goods as well as transport it back to the warehouse or
factory as desired..
Things to Note:
 The CPT term may be used for all modes of transport
 It is crucial in a CPT transaction, the “risk” passes from seller to buyer once the
seller delivers the cargo to the first carrier, whereas the costs up to the named
destination will still be for the seller.
 Terminal Handling Charges (THC) is payable to the terminal operator. To be on
the safer side, the buyer should be aware of whether or not THC is included by the
carrier as part of the freight charges. If not, then the buyer would have to shell out
money to compensate for THC.
.
 CIP - Carriage and Insurance Paid to...
Seller Responsibility: Arrange and pay for the insurance to cover the buyer’s risk and
others same as CPT
Buyer Responsibility: In CIP, once the seller hands over the goods to the road carrier for
further movement, the “risk” transfers from the seller to the buyer, but the cost of the
movement till the point of destination still remains with the seller. Any additional
insurance coverage over and above the minimum insurance coverage that the seller
covers (Different with CPT).

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Things to Note: The seller is entitled to buy a minimum level of cover to insure the
shipment and for this reason, the buyer should be alert to address the level of cover in the
agreement so as to avoid later confusions.

Category D
The generalities of Category D deal mostly with determining the destination of the
imported goods. There are three Incoterms within Category D and they are:
 Delivered at place unloaded (DPU)
 Delivered at Place (DAP)
 Delivered Duty Paid (DDP)

 DPU - Delivery At placed unloaded

Seller Responsibility: Previously known as Delivered At Terminal (DAT), this renamed
term now encompasses deliveries to all places, not just terminals. Under DPU, the seller
bears all responsibilities (including arranging and transporting the goods—up until the
goods are unloaded from the arriving means of transport at the named place of
destination). which means the seller needs to take some precautions to protect yourself
from any unforeseen or reasonably unforeseeable circumstances in delivering by DPU
terms. The seller needs to make sure that there are no transhipment issues and the cargo
reaches the agreed destination.
Buyer Responsibility: The buyer takes over once the goods have been unloaded safely
and then it's the personal responsibility to transport the goods back to the warehouse. It is
important that the point of delivery is expressly discussed and agreed upon between the
buyer and the seller..
Things to Note: The delivery port needs to be specifically addressed or else there are
chances of the goods being deported at a different destination. This rule is apt when it
comes to containerised shipments as the seller would be in charge for most of the
logistics and can be used for multiple modes of transport.
Another crucial point to be remembered whether you are a seller or buyer is that
under DPU, neither the buyer nor the seller is obliged to insure the goods and this
insurance requirement is not specifically covered in the Incoterms rules.
.

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  DAP - Delivery At Place
Seller Responsibility: The seller is in charge of ensuring the successful transport of
goods from the supplier warehouse to the destination port. The seller is responsible for
making sure that the goods are delivered to the agreed place. The seller also has to take
care to ensure that there are no transhipment or on-carriage issues and the cargo reaches
the agreed destination.
Buyer Responsibility: A major difference from DPU is that the buyer has to unload the
goods and take responsibility thereafter
Things to Note:
 The seller is obliged to deliver to an inland point, this can be done only if the
buyer has completed the customs formalities failing which the seller or their
representative will not be able to fulfill the delivery. Any additional costs or risks
in such a case will be for the buyer.
 All import duties, clearances and taxes are to be borne by the buyer as unloading is
the buyer's risk. This rule stands good involving all modes of transport.

 DDP - Delivery Duty Paid

Seller Responsibility: The seller has to sort out the costs and formalities at customs
clearance in the destination country. The seller has the maximum obligation as it involves
the delivery of the goods to the buyer at the agreed destination. The sellers under DDP
need to take some precautions to protect themselves from any unforeseen or reasonably
unforeseeable circumstances in delivering by DDP terms.
Buyer Responsibility: After the clearance of goods, the buyer can then take over and
ensure the safe transfer of all the components back to the factory or warehouse. Buyers
must be aware that when using a DDP term, they could end up paying more cost to the
seller because the seller’s cost includes the customs clearance costs, etc. The buyer must
also verify that the seller is capable of securing the import clearance directly or indirectly
as otherwise there could be delays in the transaction
Things to Note:
 Under DDP terms neither the buyer nor the seller is obliged to insure the goods
and this insurance requirement is not specifically covered in the Incoterms rules.
This crucial issue must be discussed and agreed upon as part of the sales contract
and terms of sale.

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  As you can notice, this rule emphasizes on maximum risk for the seller. From a
buyer's perspective, there is a risk of goods not getting cleared since a foreign
supplier may not be well-versed with the complex local rules
In conclusion, Incoterms are separated into two different categories:
Terms for any mode of transport Terms for sea and inland waterway transport
EXW FAS
FCA FOB
CPT CFR
CIP CIF
DPU
DAT
DDP

V. Choosing the Right Incoterm

When it comes to international sales of goods contracts, it is not enough to use an
Incoterm, it is also crucial to use the right one. There are some factors to consider when
selecting an Incoterm for a sales contract.
 Mode of Transportation
Some Incoterms are only appropriate for a specific mode of transportation, for example,
sea freight. Other International commercial terms apply to any method of transportation.
Incoterms like FAS, FOB, CFR, or CIF are for sea and inland water transport.
For Air freight, EXW, CIP, CPT, DDP, and DAP incoterms may be the right incoterm.
Choosing the right incoterm that favors the mode of transportation will prevent delays.
 Types of Goods
One must consider the nature of goods under an International sales of goods contract.
Some incoterms are best for goods that need immediate delivery, and others are not. Also,
for out-of-gauge cargoes (OOG) that cannot fit into a container, FAS Incoterm will be the
best incoterm.
 Level of experience of the parties
In choosing the right incoterm, buyers and sellers must consider their experience level.
For example, EXW Incoterm is not suitable for importers. A buyer with more experience
importing goods can decide on Ex Works Incoterm.
DAP, DDP, and DPU Incoterms are good for importers with little experience.

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  Control Over the Goods, Operations, and Cost
Incoterms like CPT and CIP do not give the importer control over the operation and cost.
The importer takes responsibility for the goods arriving at the destination. But in
Incoterms like Ex Works, the importer has more control over the goods than the seller.
 Relationship Between the Seller and Buyer
Some incoterms are suitable when one party knows little about the other party. Terms like
FAS, FOB, and FCA make sense for an importer with little knowledge of the seller. It will
ensure that the importer controls the cost and logistic chain of the goods from the point of
loading until the destination.
 Insurance Policies
It is necessary to insure the goods against any form of damage. Parties must consider
insurance policy and whose responsibility it is to insure goods. They must choose the
right incoterm accordingly. In CIF incoterm, the seller must insure the goods against
damage or loss. Under CPT Incoterm, the buyer has no duty to insure the goods..

VII. Common Mistakes and Pitfalls

A. Common mistakes
Some common Incoterms mistakes that buyers and sellers make include:
 Not Specifying the Exact Destination
One Incoterms mistake that importers make is that they don’t specify the exact
location that they want their goods delivered to. Simply using the name of a city like FCA
Miami or FCA Los Angeles isn’t going to give the seller a good enough indication of
where to transport goods. With only this information to go on, the seller may choose any
delivery point within the general area provided.
This can put the buyer in a very inconvenient position. You will have to locate
your goods and then pay extra money to have them picked up and delivered to where you
intended them to be originally delivered. To prevent mistakes like this from happening,
give a specific location. This could be the name of a port or even an address and postal
code.

 Using FOB Incoterms For Containerized Cargo

Despite popular belief and practice, the FOB Incoterm should only be used for
non-containerized ocean freight shipments. This error is so common that it’s become a
misconception that’s extremely etched in the minds of both importers and exporters.

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 The main risk involved lies at the port of origin. Under FOB, risk is officially
transferred when the cargo is loaded on board the vessel. However, it is common practice
for shippers to hand over the cargo to the carrier at the terminal where it awaits to be
loaded onto the vessel.
As the cargo sits at the terminal, it is not considered to on board the vessel yet.
Any damage suffered during this time is technically still the shipper’s responsibility and
the shipper’s insurance should also cover this portion of the process.
However, in the event of disputes, shippers can and do often argue that he has
done his part. So to avoid hassles, delays, and more importantly, the disputes that could
risk souring a relationship with a vendor, the result is often the consignee having to
assume this cost.
FCA, CPT, and CIP are the correct alternatives as they are meant for
containerized freight. For each of these risk is transferred at origin when the cargo is
handed over to the carrier at the agreed upon location at origin.
 Matching the Wrong Incoterms with Bank Security Requirements
If an international payment method like a letter of credit is agreed upon between
the buyer and seller, the chosen Incoterms needs to match the requirements of the seller’s
bank. Some buyers and sellers don’t realize this, unfortunately. If the Incoterms aren’t
compatible, documents must be submitted to the buyer’s bank to prove that both parties
trust each other and the conditions have been agreed to.
Rather than go through this hassle, buyers and sellers should agree to Incoterms in
the C Category like CIP or CIF. Incoterms within this category are better used for the
letter of credit type of payment. .
 Using the Wrong Incoterms for the Chosen Mode Of Transport
As we mentioned before, certain Incoterms are only applicable to specific modes
of transportation. It’s an easy mistake to avoid, but one that buyers and sellers make
nonetheless. To prevent this from happening, you and the seller should check your chosen
Incoterms to make sure that it applies to the mode of transport that will be used.
 Being Unfamiliar with Import Regulations of Certain Countries
DDP Incoterms place just about all of the import responsibilities on the seller.
Some of these responsibilities include the local taxes of the buyer's country, duties and
special documentation for regulated goods.
A seller that does not follow the customs regulations of the buyer's country will
make the shipping process a disaster for both parties. Before both the buyer and seller

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agree to Category D Incoterms, the buyer should make sure that the seller is familiar with
the customs responsibilities of the buyer’s country.
Secondly, the buyer needs to verify that the seller is a registered overseas importer
with their country’s customs organization. This will be a requirement if DAP Incoterms
are used.
B. How to avoid these mistakes.
There are a few different ways that you can avoid these Incoterms mistakes that
we discussed. The first one we’ve already hinted at and that is to communicate with your
seller to ensure they understand the chosen Incoterms as well as you do.
While Incoterms help facilitate global trade between nations by dictating rules
between buyers and sellers, misunderstandings as to what the Incoterms mean can occur.
Discussing the Incoterms with your seller will help you determine if they’re on the same
page or not.
The most useful tool that can be used to prevent these mistakes from ever
occurring is a Licensed Customs Broker. Whether you’re a buyer or a seller, a broker can
provide you with some important information regarding import or export procedures.
They’re also experts on Incoterms, which means you can have them verify that the
Incoterm you and the other party agree on is understood by both of you.

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