# Incoterms

Source: https://contracko.com/glossary/incoterms

# Incoterms

Standardised ICC trade terms defining delivery, risk and cost allocation in international sales.

## 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 Outdated version references (e.g. Incoterms 2010 instead of 2020) can also lead to disputes where the two versions diverge.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.

### How Contracko helps

Contracko extracts delivery and trade term metadata from uploaded sales and supply contracts, making it straightforward to audit which Incoterm version applies across a supplier portfolio. This is especially useful when renegotiating or renewing contracts, ensuring outdated Incoterm versions are identified and updated.

## Relevant for

[Logistics & Distribution](https://contracko.com/industries/logistics)[Freight Forwarding](https://contracko.com/industries/freight-forwarding)[Shipping](https://contracko.com/industries/shipping)[Manufacturing](https://contracko.com/industries/manufacturing)

## Related clauses

- [Retention of Title](https://contracko.com/clause-library/retention-of-title)
- [Supply Chain Liability](https://contracko.com/clause-library/supply-chain-liability)

## Related terms

- [Delivery terms](https://contracko.com/glossary/delivery-terms)
- [Purchase conditions](https://contracko.com/glossary/purchase-conditions)
- [Retention of title](https://contracko.com/glossary/retention-of-title)
- [Supply chain liability](https://contracko.com/glossary/supply-chain-liability)

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## Frequently asked questions

Common questions about this term.

- **Q:** What is the most buyer-friendly Incoterm?
  **A:** DDP (Delivered Duty Paid) places the maximum obligation on the seller: the seller bears all costs and risks including import duties until the goods reach the buyer named place. It is the most buyer-friendly and the most burdensome for the seller.

- **Q:** Why does specifying the version year matter?
  **A:** Incoterms 2020 made significant changes compared to Incoterms 2010, particularly for FCA and CIF. Referring to an earlier version without naming it explicitly can create confusion about which rules apply to specific obligations.

- **Q:** Do Incoterms govern title transfer as well as risk?
  **A:** No. Incoterms only govern risk transfer, delivery obligations and cost allocation. Title (ownership) transfer is governed by the applicable contract law and any retention-of-title clause.

- **Q:** Can Incoterms be used for domestic sales?
  **A:** Yes, although they are designed for international trade. For domestic sales the customs and import/export provisions are irrelevant, but the risk and cost allocation rules still work. Parties sometimes prefer simpler domestic delivery terms instead.

- **Q:** What happens if no Incoterm is specified?
  **A:** The parties fall back on applicable national contract law to determine when risk passes, who pays for transport and insurance, and who clears customs. This creates significant uncertainty and is a common cause of disputes in cross-border trade.

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