When you buy or sell goods to another country, you need to define who pays for each expense, who handles the paperwork, and, above all, when each party assumes the risk. Without these clear rules, an international contract is open to interpretation, and that almost always ends in a costly dispute.
That’s where Incoterms come in: rules from the International Chamber of Commerce that define the obligations, costs, and risks between buyer and seller. If you choose the right term, you can better calculate the price and coordinate transport, which helps reduce disputes in your international trade operations.
To fully understand how they work, it’s advisable to review the logic behind the rules before including them in a contract. Here are the essentials:
Key Points
Incoterms distribute costs, risks, and responsibilities.
You must choose the term according to the transport and the transaction.
Correct application improves the clarity of the contract.
Essential Concepts and Scope of Incoterms
Incoterms® clarify who organizes each stage of transport and who pays certain costs, as well as marking when the risk passes from the seller to the buyer. However, they do not replace the sales contract nor do they regulate all the legal aspects of a transaction: they are only one part of the agreement.
Definition and Function in International Transactions
Incoterms® are rules of the International Chamber of Commerce (ICC) that you can incorporate into an international sales contract. Each term uses three letters, such as FCA, CIP, DAP, or DDP, and you must always indicate the agreed place and the applicable version, for example: FCA Terminal of Valencia, Incoterms® 2020.
These rules describe obligations related to delivery, transport, documentation, customs clearance, and insurance when applicable. They help companies from different countries speak the same language and avoid misunderstandings.
If you want to see it with concrete examples, this practical explanation of what Incoterms are and what they are used for provides a clear explanation. The Incoterms® 2020 include 11 terms. Seven apply to any mode of transport, and four are specific to maritime or inland waterway transport.
Buyer and Seller Responsibilities
Each rule assigns specific tasks to the parties. The seller typically prepares the goods, provides the agreed-upon documents, and fulfills export obligations if the term requires it.
The buyer may be responsible for main loading, import clearance, taxes, and final delivery, depending on the chosen Incoterm. Don’t just rely on the term’s name: review what it entails in practice.
For example, with FCA, the seller delivers the goods to the named carrier and usually manages export, while the buyer arranges main transport. With DDP, on the other hand, the seller assumes many more obligations, including import and delivery to the specified destination, unless the contract states otherwise.
The table shows some differences:
Incoterm
Seller’s Key Obligation
Buyer’s Typical Obligation
EXW
Make the goods available
Load, transport, and clear
FCA
Deliver to the carrier and export
Arrange main transport
CIF
Arrange freight and marine insurance
Import and receive at destination
DAP
Transport to the agreed destination
Import and pay duties
Costs, Risks, and Delivery Point: Cost and risk don’t always change hands simultaneously. A seller might pay for transport to a destination, but the buyer already bears the risk from a previous delivery. Therefore, always distinguish who pays, who arranges, and who is liable for loss or damage. Tip: The delivery point must be very clear. It’s not enough to indicate a city or port if there are several terminals; specify which one exactly. In a CPT transaction, for example, the seller pays for transport to the named destination, but the risk passes to the buyer when they deliver the goods to the first carrier. In DAP, the seller retains the risk until the goods arrive ready for unloading at the agreed location. What about insurance? CIP requires broader coverage than CIF, although both assign insurance to the seller under certain conditions. This guide on responsibilities, costs, and risks provides a good comparison of these assignments. Aspects Not Regulated by Incoterms: Incoterms® do not establish the price of the goods or the method of payment. They also do not determine the transfer of ownership or the consequences of non-compliance. They do not determine the applicable law, the competent court, or how to resolve a dispute. You must include those issues in the sales contract or in separate documents. Nor do they replace the customs, tax, health, or export control regulations of each country. An Incoterm may assign import clearance to the buyer, but it does not…