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3. Focus on Incoterms®: Standard Trade Terms

Teaching rewrite of Incoterms® foundations (allocation of cost, risk, customs, insurance). Pedagogical summaries only — not the official ICC Incoterms® rules text. For live contracts, buy and cite the current ICC publication.

A bare price like “€1000 per unit” does not say where delivery happens, who pays freight, who clears customs, or who buys cargo insurance. An Incoterms® rule plus a named place (and the edition) fills those gaps:

€1000 per unit DDP Beijing Incoterms® 2010

What Incoterms® allocate​

Incoterms® (International Commercial Terms) are ICC standard trade terms — FOB, CIF, FCA, and the rest. In a sale contract they allocate, between seller and buyer:

  1. Transport costs
  2. Risk of loss or damage
  3. Export / import customs clearance and duties (where applicable)
  4. Insurance duties (only under CIF and CIP)

They also pin where the seller delivers (or hands goods to the carrier) when combined with a named place. Traders often call them “shipping” or “delivery” terms; ICC’s preferred label is trade terms, because they cover more than freight.

Sale vs carriage

Incoterms® live in the contract of sale (seller ↔ buyer). Do not confuse them with liner terms or other carriage-contract labels (shipper ↔ carrier). Tell your forwarder which Incoterm you sold under so the booking matches the sale.

The eleven Incoterms® 2010 rules sit on a ladder from minimum seller duty (EXW — buyer runs the whole move from the works) to maximum seller duty (DDP — delivered, import-cleared, ready to unload at destination).

flowchart LR
  EXW[EXW] --> FCA[FCA]
  FCA --> CPT[CPT / CIP]
  CPT --> DAT[DAT / DAP]
  DAT --> DDP[DDP]
  FAS[FAS] --> FOB[FOB]
  FOB --> CFR[CFR / CIF]

Any mode vs sea / inland waterway​

ClassRulesUse when
Any mode (incl. multimodal; ship may be one leg)EXW, FCA, CPT, CIP, DAT, DAP, DDPContainers, air, road, rail, multimodal
Sea / inland waterway onlyFAS, FOB, CFR, CIFPort-to-port; often bulk / string sales
Do not FOB a container by truck

Maritime rules assume a port delivery story and (for CFR/CIF) a transport document that can support selling goods in transit. Using FOB/CIF for pure air or inland container moves can put the seller in documentary breach. Prefer FCA / CPT / CIP for those moves.

Sea/inland waterway:  FAS · FOB · CFR · CIF
Any mode:             EXW · FCA · CPT · CIP · DAT · DAP · DDP
Incoterms® 2020 note

This lesson follows the Incoterms® 2010 map (the edition in many older guides and forms). Incoterms® 2020 is the current ICC edition: among other updates, DAT was renamed DPU (Delivered at Place Unloaded). Always name the edition in the contract.

How to use them in contracts​

Incorporate explicitly, e.g.:

  • Append to price/place: FOB Rotterdam Incoterms® 2010
  • Or pre-print on forms: “All transactions under this document are subject to Incoterms® 2010”

They are not legislation. Parties may exclude them or draft bespoke delivery/risk terms. If you use “FOB” / “FCA” without naming Incoterms®, meaning becomes ambiguous — though some courts treat Incoterms® as widely known trade usage under CISG Art. 9(2) even without an express cite. Best practice: always write the rule and the year.

Each contract is governed by the edition it cites. If it says only “Incoterms®”, tribunals often apply the version in force at contracting. ICC revises roughly once a decade — monitor between revisions, but you need not refresh yearly.

Brief origin​

Major trading countries used to define FOB/CIF differently. ICC published the first broadly accepted Incoterms® set in 1936, with later revisions including 1953, 1967, 1976, 1980, 1990, 2000, and 2010 (then 2020).

C-terms vs D-terms (the loss-in-transit test)​

C-terms (CFR, CIF, CPT, CIP)D-terms (DAT, DAP, DDP)
Delivery fulfilled when?Goods handed to the carrier / on board as the rule requires (shipment contract)Goods arrive at the named destination ready as the rule requires (arrival contract)
Risk in international transitGenerally buyer’s after the shipment pointGenerally seller’s until destination delivery
If cargo is lost at seaSeller already delivered; buyer looks to insurance (and bears gaps)Seller may be in breach — substitute goods / damages / other remedies

FOB and CIF are both shipment contracts — a common myth is that “C” somehow means arrival. Under CIF, risk typically passes on board at shipment; the named destination is mainly where freight (and under CIF, insurance) is paid to, not where risk ends.

C-term:  seller risk ──► [shipment point] ──► buyer risk  ··· freight paid toward destination
D-term:  seller risk ──────────────────────────────► [destination delivery]

What Incoterms® do not cover​

TopicWho handles it
Price / payment methodSale contract
Transfer of title / propertyNational law + contract (e.g. retention-of-title clause) — not Incoterms®
Breach remediesSale contract + governing law
How goods travel to the delivery pointSpecify if it matters (e.g. refrigerated containers to FOB port)
Mandatory local lawCan override contract choices

Delivery under an Incoterm ≠ automatic transfer of ownership. CISG also does not unify title transfer. Exporters often want a retention of title until paid — check local counsel; not every jurisdiction enforces it the same way.

Insurance duties​

Only CIF and CIP make insurance a seller→buyer contractual duty. Other rules do not force either side to insure as between the parties — but commercial prudence still says insure what you bear.

Under CIF/CIP (2010 practice):

  • At least Institute Cargo Clauses (C) (or similar) minimum cover
  • Sum insured: contract price + 10%, in the contract currency

Minimum cover often excludes theft, pilferage, and rough handling — weak for high-value manufactures. War / strikes / riots (SRCC) and similar extensions must be named; vague “maximum insurance” leaves the seller to pick cover and creates uncertainty.

Draft the cover

Agree in the sale contract: which clauses, from where to where, storage days, war/SRCC, profit %, currency, and other add-ons — do not rely on the Incoterm alone.

Incoterms® 2010 design notes (operator view)​

Change / featureWhy it matters
DAT + DAP replace DAF / DES / DEQ / DDU13 → 11 rules; DAT = unloaded at terminal; DAP = ready for unloading at place
Two classes: any-mode vs seaStops misusing maritime rules for containers/air
“On board” (not ship’s rail) for FOB/CFR/CIFMatches modern practice
Domestic + internationalExport/import formalities only where applicable
Guidance NotesTeaching aids — not part of the binding rule text
Electronic communicationsSame effect as paper if agreed or customary
Security clearancesA2/B2, A10/B10-style assist / obtain duties
Terminal handlingClearer allocation so buyers are less often billed twice
“Procure goods shipped”Supports string sales (middle sellers who do not themselves load)

Pedagogical map of the 11 rules (2010)​

Official text required

The blurbs below are teaching summaries. Negotiate from the full ICC Incoterms® book for your edition.

Any mode of transport​

RuleSeller delivers when…Watch-outs
EXWGoods at buyer’s disposal at named works/place; seller need not load or clear exportBuyer runs export — avoid if buyer cannot clear; FCA often better if seller should load
FCAGoods to carrier (or buyer’s nominee) at named place; seller clears export where applicableName the exact point; risk passes there
CPTGoods to carrier; seller pays carriage to named destinationDelivery (risk) ≠ destination (cost); default risk may pass at first carrier
CIPLike CPT + seller buys insurance for buyer’s riskInsurance is minimum unless upgraded
DATUnloaded at named terminal at destinationSpecify terminal/point; beyond terminal → DAP/DDP
DAPAt named place, ready for unloading (not import-cleared)Import formalities/duties for buyer
DDPAt named place, import-cleared, ready for unloadingMax seller duty; avoid if seller cannot clear import; VAT/taxes unless agreed otherwise

Sea and inland waterway​

RuleSeller delivers when…Watch-outs
FASAlongside the vessel at named port of shipmentBad fit for containers handed at a terminal → use FCA
FOBOn board the vessel (or procure already on board)Containers usually FCA; string sales via “procure”
CFROn board + seller pays freight to named destination portRisk on board at shipment; unloading cost fights common; containers → CPT
CIFLike CFR + minimum insurance for buyerSame two-point cost/risk split; containers → CIP

Under CPT / CIP / CFR / CIF, the seller’s delivery duty is met at the shipment / hand-over point — not when goods arrive.

A/B article skeleton​

Each rule pairs A (seller) and B (buyer) articles covering, among other things: general duties; licences / security clearances; carriage & insurance contracts; delivery / taking delivery; risk; costs; notices; delivery documents / proof; packing / inspection; information assistance.

You do not memorize article numbers in this lesson — you learn to ask for each deal: who contracts carriage, who insures, where risk passes, who clears export/import, who pays which terminal charges.

Shipment vs arrival contracts​

FamilyRules (2010)Idea
ShipmentEXW, FAS, FOB, FCA, CFR, CIF, CPT, CIPSeller done at the agreed shipment/hand-over point; L/C culture grew with this model
ArrivalDAT, DAP, DDPSeller still at risk (and usually paying carriage) until destination delivery

F-terms and C-terms share shipment-contract risk logic — C-terms simply add that the seller also pays main carriage (and under CIP/CIF, buys insurance).

Why more deals quote D-terms​

  • One party arranging the whole move can get better freight rates
  • Seller keeps quality/timing control on high-value goods
  • Buyers compare offers more easily when price is “delivered”

Higher D-term prices often price in that extra risk.

Practical traps​

Ship before B/L. Goods may arrive before the buyer holds an original bill of lading. Masters sometimes release against bank guarantees / LOIs. That practice weakens the documentary-credit security model (goods only against original B/L) — treat it as a risk, not routine.

Variants (“CIF landed”, “FOB stowed”, …). Incoterms® 2010 does not standardize those add-ons. Changing cost wording can accidentally shift risk or customs responsibility. If you vary a rule, write explicitly what moves: duties, clearance admin, non-clearance risk, unloading costs, or all of the above.

Operator checklist​

  1. Cite [RULE] [named place] Incoterms® [year] every time
  2. Keep the official ICC book for that year at hand
  3. Pick any-mode vs sea-only correctly (containers → FCA/CPT/CIP, not FOB/CIF by habit)
  4. Add contract detail Incoterms® omit: insurance extent, transport constraints, force majeure / time extensions if you clear or deliver inland abroad
  5. Align forwarder instructions with the sale Incoterm
  6. On C-terms, remember: named place ≈ cost end-point; risk already passed at shipment — specify both points when it matters

Court snapshots (usage, not magic words)​

Public U.S. cases often treat Incoterms® as CISG Art. 9(2) usages when the governing law brings in the CISG — even if the contract only said “CIF …” without “Incoterms®”:

  • St. Paul Guardian Ins. v. Neuromed (S.D.N.Y. 2002): MRI sold “CIF New York Seaport”; damage in transit. Court applied Incoterms® CIF via German law / CISG usages — risk had passed on shipment of goods loaded in good order.
  • BP Oil Int’l v. Empresa Estatal Petroleos de Ecuador (5th Cir. 2003): CFR gasoline; on-load inspection OK, arrival gum content high. Court applied Incoterms® CFR via CISG usages — risk passed on loading; seller had delivered.

Lesson: still write the edition; do not gamble that a court will fill gaps the way you hoped.

Check: Incoterms®​

Quiz

Incoterms® trade terms

1 / 5

Incoterms® primarily allocate…

Pick an answer to see if you are right.

Takeaways​

Remember
  • Always write rule + named place + Incoterms® year
  • Sea-only vs any-mode — do not FOB/CIF container/air by habit
  • C-terms = shipment contracts (two points: risk vs paid freight); D-terms = arrival risk for seller
  • Incoterms® ≠ title, price, payment method, or carriage-contract terms
  • Only CIF/CIP force seller-bought insurance — and it is minimum unless you specify more

Further Reading​