Incoterms - a brief guide

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Incoterms describe the most commonly used terms of trade in commercial contracts and are published by the International Chamber of Commerce (ICC). These terms standardise the terminology used in International trade and are periodically reviewed and revised where appropriate to reflect the current commercial transport practices. The latest version is 2020. 

The main aim of these terms is to eliminate any doubts or misunderstanding between the buyer and the seller and they do this by: 

• Defining the method of delivery of the goods adopted by the seller 

• Describing exactly what charges are included in the price quoted by the seller 

• Setting out the responsibilities of the parties to the contract of sale for the arrangement of insurance, shipping and packaging.

In any contract between a seller and buyer, the use of Incoterms is voluntary and may not always be used. If you are the buyer and a commitment to purchase has been made, you must inquire as to what precisely is covered in the sellers unit/contract price and be prepared to seek your own quotes for the likes of goods in transit insurance (preferably from supplier’s premises to your own or that of the designated storage facility/warehouse or even direct to your end buyer). Freight charges, duties and imposts are all additional costs if for example the overseas supplier is selling ‘ex-works’

In terms of the insurance, to de-risk the situation, think carefully about when and where in the time line/trade cycle does title in the consignment/shipment legally pass from the seller to the buyer and at that point the seller becomes the owner.  It is a bit like selling and buying a house. As the buyer you insure the property when title passes to you, if you don’t imagine the risks and the consequences of failing to do so should the unforeseen happen. The same could happen to the buyer if on paper title has passed but physically the goods are still in transit. More on this later.

If the Incoterm rules are being applied to a transaction they should be incorporated into the terms of the specific contract or the sellers general terms and conditions of sale. For example a seller may quote CIF Felixstowe, which means the price they have quoted includes ‘C’ – the cost of the goods, ‘I’ Insurance of the goods – ‘F’ – the freight charges from the seller to the port of arrival. In this case it is Felixstowe.  Delivery terms should always specify the destination or the place at which point the responsibility / title / liability passes from the seller to the buyer.

The acronyms or abbreviations used to describe the key incoterms are set out below. These can be modified by having additional terms added. For example using the term landed alongside CIF Felixstowe shows that the seller’s price includes the cost of unloading the goods.