The Incoterms® Rules – what are they and how do they work?

March 17, 2021

The Incoterms® Rules (‘Incoterms’) are a standardised set of international contractual terms developed by the International Chamber of Commerce which can be included in contracts for the Sale of Goods.

The current version came into effect on 1 January 2020, although older versions can still be used.

Depending on the nature of the contract, the Incoterms can be useful in helping the parties to identify the obligations, costs and risks involved in performing the contract.

The Incoterms are intended to remove uncertainties and prevent disputes from arising by providing a single set of rules which are interpreted in the same way in different countries.

Set out below are a number of answers to commonly asked questions regarding the Incoterms and how they operate.

What do the Incoterms cover?
The Incoterms provide certain key terms which can be incorporated into a sales contract. However, they are not in themselves a sales contract, so they do not provide the entire contract between the parties. A contract should always be drafted to properly document the whole agreement, incorporating the Incoterms where desired.

Examples of the terms that the Incoterms provide include:-

  • Which party should cover the costs of insurance;
  • At what point risk (i.e. the responsibility for damaged or lost goods) passes to the buyer;
  • Which party should cover the transportation costs; and
  • Which party is to deal with the importing or exporting formalities as required.

However, as stated above, the Incoterms are not a complete contractual document, and the parties should always properly consider and document their agreed commercial terms such as the price, payment terms for the goods themselves, when title (ownership) passes, and liability in the event of a breach of contract since the Incoterms do not address these aspects.

The Incoterms also do not address governing law or which legal jurisdiction will have authority to hear a claim arising from a dispute between the parties, and these matters will be an important inclusion in to the contract for greater certainty in the event of a dispute arising.

How many different sets of Incoterms rules are there?
In the latest edition, the Incoterms® 2020, there are 11 different sets of rules that can be selected by the parties. The majority of these sets of rules can apply to goods being sent via any mode of carriage (i.e. air, land or sea), but a few are only applicable when goods are sent by sea or waterway.

When choosing which set of Incoterms to apply to a contract, the parties should therefore review and consider which set of rules best reflects their requirements before incorporating them into the contract.

The Incoterms rules for any modes of transport are:

  • EXW – Ex Works
  • FCA – Free Carrier
  • CPT – Carriage Paid To
  • CIP – Carriage and Insurance Paid To
  • DAP – Delivered at Place
  • DPU – Delivered at Place Unloaded
  • DDP – Delivered Duty Paid

The four sets of Incoterms rules for sea and inland waterway transport are:

  • FAS – Free Alongside Ship
  • FOB – Free on Board
  • CFR – Cost and Freight
  • CIF – Cost Insurance and Freight

When specifying the above in a contract, each of the above will be followed by the place of delivery / place of destination / port of loading / port of destination (as appropriate).

Are Incoterms mandatory?
The use of Incoterms is entirely voluntary, although they are common practice in international trading agreements as they are internationally recognised.

Can Incoterms be varied?
If any specific Incoterms rule does not properly reflect the agreement between the parties, the Incoterms can be varied and tailored to specific circumstances. For example, if an Incoterm states that the seller is responsible to pay import costs, but the parties have agreed the buyer should be the one to pay, this could be expressly varied in a contract between the parties.

A party who wishes to vary the Incoterms in their contract should ensure that the variation does not affect or introduce uncertainty to other terms of the contract, and taking legal advice on any such contract is always recommended before signing.

If you have any questions about contents of this article or how we could help you or your business, please contact our commercial team.

Mark Chapman
Partner, Commercial
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This reflects the law and market position at the date of publication and is written as a general guide. It does not contain definitive legal advice, which should be sought in relation to a specific matter.

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