In international trade, accurately defining the terms of delivery and the division of responsibilities between the buyer and the seller is crucial. This is precisely why Incoterms (International Commercial Terms) rules were established, which serve as an international standard outlining the rights and obligations of the parties in commercial contracts. In this article, we will explain what exactly Incoterms rules are, their significance, and how to properly apply them in business practice.

What are Incoterms rules?

Incoterms are a set of international rules that define the conditions of sale in international trade. They were developed by the International Chamber of Commerce (ICC) to standardise the interpretation of the most widely used terms in commercial contracts.

The currently applicable version is Incoterms 2020, which came into effect on January 1, 2020. These rules specify:

✅the division of costs between the seller and the buyer,
✅the moment the risk associated with the goods transfers from one party to the other,
✅responsibility for customs formalities and insurance of the goods,
✅duties related to the organisation of transport,
✅the place of delivery of the goods.

The significance of Incoterms rules in international trade

Proper application of Incoterms rules is crucial for all parties involved in an international transaction for several reasons:

✅ Facilitation of trade – standard terms simplify negotiations and the conclusion of contracts.
✅ Cost calculation – they allow for a precise determination of which costs are borne by the seller and which by the buyer.
✅ Risk management – they clearly define the moment when the risk of loss or damage to the goods passes.
✅ Elimination of misunderstandings – clearly defined delivery terms minimise the risk of conflicts between the contracting parties.

Incoterms 2020 – overview and application

Incoterms 2020 includes 11 rules, which can be divided into two main categories: rules for all modes of transport and rules dedicated to sea and inland waterway transport.

Rules for all modes of transport:

EXW (Ex Works)

🔸The seller makes the goods available at their premises or warehouse.
🔸The buyer bears all costs and risks from the moment of taking delivery of the goods.
🔸The buyer is responsible for loading, transport, export and import formalities.

Application: Ideal for sellers who want to minimise their obligations. Not recommended for inexperienced importers.

FCA (Free Carrier)

🔸The seller delivers the goods to a carrier designated by the buyer.
🔸The seller is responsible for export formalities.
🔸The buyer bears the costs of main transport and is responsible for import formalities.

Application: A popular rule for most modes of transport, especially with containers.

CPT (Carriage Paid To)

🔸The seller pays for transport to the specified destination.
🔸The risk passes to the buyer at the moment the goods are handed over to the first carrier.
🔸The seller is responsible for export formalities, the buyer for import formalities.

Application: Convenient for multimodal shipments when the buyer wants to have transport paid.

CIP (Carriage and Insurance Paid To)

🔸Similar to CPT, but the seller additionally provides insurance for the goods.
🔸The insurance must cover at least 110% of the value of the goods.

Application: When the buyer wants to ensure that the goods are insured during transport.

DAP (Delivered at Place)

🔸The seller delivers the goods to the specified location, ready for unloading.
🔸The seller bears the costs and risks until the goods are delivered.
🔸The buyer is responsible for import formalities and unloading.

Application: When the seller wants to control the transport but does not want to deal with import clearance.

DPU (Delivered at Place Unloaded)

🔸The only rule that requires the seller to unload the goods.
🔸The seller bears the costs and risks until the unloading at the agreed place.

Application: When the buyer wants to receive the goods already unloaded, e.g., at a terminal.

DDP (Delivered Duty Paid)

🔸The seller bears the maximum responsibility.
🔸Delivers the goods, pays all transport costs, export and import duties.

Application: When the buyer wants to receive the goods “at the door” without any customs formalities.

Rules dedicated to sea and inland waterway transport:

FAS (Free Alongside Ship)

🔸The seller delivers the goods alongside the ship at the loading port.
🔸The buyer is responsible for loading onto the ship and further transport.

Application: For shipments of bulk goods or very large loads.

FOB (Free on Board)

🔸The seller delivers the goods on board the ship at the loading port.
🔸The risk passes to the buyer once the goods are on the ship.

Application: One of the most popular rules in sea transport.

CFR (Cost and Freight)

🔸The seller pays for sea transport to the destination port.
🔸The risk passes to the buyer once the goods are loaded onto the ship.

Application: When the buyer wants assurance regarding the costs of sea transport.

CIF (Cost, Insurance and Freight)

🔸Similar to CFR, but the seller additionally provides marine insurance.

Application: Popular in the trade of bulk goods and raw materials.

Practical tips for applying Incoterms rules

✅Accurate definition of the place – always specify the exact delivery location (e.g., “FCA Warsaw, Poland”).
✅Current version – always indicate which version of Incoterms applies to the contract (e.g., “FCA Warsaw, Poland, Incoterms 2020”).
✅Adjustment to the mode of transport – choose a rule appropriate for the planned mode of transport.
✅Consideration of experience – less experienced importers should avoid rules that place many obligations on them (e.g., EXW).
✅Calculation of total costs – it is worth conducting an analysis of all costs associated with the chosen Incoterms rule before selecting it.

Summary

The Incoterms 2020 rules are a fundamental element of international trade, allowing for a precise definition of obligations, costs, and risks associated with the delivery of goods. Their proper application can significantly streamline transactions, minimise misunderstandings, and optimise logistics costs.

We offer comprehensive consulting on the selection and application of the appropriate Incoterms rules for your international transactions. We invite you to contact us to learn how we can assist your company in effectively managing the supply chain in international trade.