Incoterms

Definition

Incoterms are a set of standardised three-letter trade terms published by the International Chamber of Commerce that define who bears the cost, risk and responsibility for transport, insurance and customs at each stage of an international sale. Terms such as EXW, FCA, CIF and DDP allocate the point at which risk passes from seller to buyer. Specifying the Incoterms version (e.g. Incoterms 2020) and the named place is essential.

Example

A contract specifying "CIF Rotterdam (Incoterms 2020)" means the seller pays carriage and insurance to Rotterdam but risk passes on shipment.

Why this is a business risk

Selecting the wrong Incoterm, or failing to specify one at all, creates ambiguity about who bears the cost and risk of goods in transit. This is particularly damaging when cargo is lost, damaged or delayed: without a clear Incoterm, both parties may claim the loss belongs to the other. Outdated version references (e.g. Incoterms 2010 instead of 2020) can also lead to disputes where the two versions diverge.

How to manage it

• Always specify the Incoterms version year and the named place of delivery or risk transfer in the contract.
• Choose the Incoterm that matches the actual transport arrangement: EXW if the buyer organises everything; DDP if the seller delivers duty-paid to the buyer site.
• Verify that insurance obligations under the chosen Incoterm (e.g. CIF and CIP require minimum insurance) are met and documented.
• Coordinate the Incoterm with the payment terms: the payment trigger should align with the point at which risk and documents transfer.
• For recurring trade relationships, set a standard Incoterm in the framework agreement and review it annually as logistics arrangements change.