Key takeaways
- There are eleven rules. Four apply only to sea and inland waterway transport.
- Each rule allocates ten obligations to the seller and ten to the buyer.
- Choosing a sea-only term for a containerised road or air movement is a common and expensive error.
- The term decides where risk transfers, which is a separate question from who pays.
3 minute read
An Incoterm is not shipping jargon. It is the clause that allocates cost, risk and customs responsibility between buyer and seller, and it does so with more precision than most contracts using it appear to realise.
Eleven rules, in two families
The Incoterms rules are published by the International Chamber of Commerce. The current edition is Incoterms 2020, and the structure is worth knowing before the individual terms are.
The split between the two families is the most practically important thing in the whole system, because using a term from the wrong family is the error that most often produces an argument at a port.
Verified fact[1]
Incoterms 2020 contains eleven rules. Seven apply to any mode or modes of transport: EXW, FCA, CPT, CIP, DAP, DPU and DDP.
Verified fact[1]
Four apply only to sea and inland waterway transport: FAS, FOB, CFR and CIF.
Capital Africa analysis
FOB and CIF are the two terms non-specialists reach for by habit, and both are sea-only. Applied to a container moving by road across a West African border they describe a delivery point that does not exist in that journey.
What each rule allocates
The official text is not a definition in a sentence. Each rule sets out a matched pair of obligation lists, which is what allows the term to settle arguments rather than start them.
Reading the actual lists for the term you are about to sign takes fifteen minutes and is the single highest-return piece of preparation available in a trade transaction.
Verified fact[1]
In the official ICC text each rule is broken into ten seller obligations, A1 to A10, and ten buyer obligations, B1 to B10, covering delivery, risk, transport, insurance, customs, costs and documents.
Verified fact[1]
DDP places the maximum obligation on the seller: delivery at the named destination, cleared for import, with all costs and risks including import duties and taxes.
Risk and cost are different questions
The most consequential confusion is treating the term as a statement about who pays. It is also, and more importantly, a statement about the moment at which risk of loss or damage passes from one party to the other.
Those two points do not always coincide, and a party can find itself paying for carriage on goods whose risk it no longer carries, or carrying risk on goods it is not paying to move.
Capital Africa analysis
Before agreeing a term, establish two things separately: who arranges and pays for each leg, and at exactly which physical point risk transfers. If a counterparty cannot answer the second question about their own proposed term, that is worth knowing early.
Requires further review
This piece describes the structure of the rules. It does not substitute for reading the official ICC text of the specific term, and it is not legal advice on your contract.