Incoterms: the three letters that decide who pays when it goes wrong

Incoterms are the standard trade terms published by the International Chamber of Commerce that say, in three letters plus a named place, who arranges transport, who bears the cost, where risk passes from seller to buyer, and who clears the goods through customs. They are written into the sales contract, and they are the shortest expensive sentence in it.

What they do not do is transfer ownership. Title passes according to the contract and the applicable law; an incoterm allocates cost and risk only. Contracts that rely on the incoterm to say who owns the goods are silent on the point they most needed to cover.

What incoterms actually settle

• Who arranges and pays for carriage, and to which point.
• Where risk of loss or damage passes — often a different place from where cost stops.
• Who handles export clearance, and who handles import clearance and duty.
• Who is obliged to insure, and to what level of cover.
• What documents each side must provide to the other.

The split between cost and risk is where most disputes start. Under the C-terms the seller pays freight to the destination but risk has already passed at shipment — so goods damaged mid-voyage are the buyer’s loss even though the seller booked and paid for the vessel.

The families, briefly

• E-term (EXW): the buyer collects from the seller’s premises and does everything else, including export formalities they may not legally be able to complete.
• F-terms (FCA, FAS, FOB): the seller delivers to a carrier or port named by the buyer; the buyer pays the main carriage.
• C-terms (CFR, CIF, CPT, CIP): the seller pays main carriage to the destination, but risk passes at shipment.
• D-terms (DAP, DPU, DDP): the seller bears cost and risk to the named destination; under DDP the seller also pays import duty and taxes.

Two terms deserve particular caution. EXW puts export clearance on a buyer who may not be established in the exporting country; FCA is usually the better choice. DDP puts import clearance and duty on a seller who may not be registered for tax in the destination country, which can make it impossible to perform as written.

An incoterm without a named place is incomplete. "CIF" means nothing on its own; "CIF Rotterdam, Incoterms 2020" means something specific. Always state the rule, the place, and the version — the 2010 and 2020 editions differ, and both remain in use because contracts choose them explicitly.

Where the incoterm has to appear

1. In the sales contract or the terms of the accepted quotation — this is the version that governs.
2. On the proforma invoice, so the buyer’s bank writes the letter of credit on the right basis.
3. On the commercial invoice, because customs uses it to work out the dutiable value.
4. In the transport instructions, so the freight is actually booked the way the contract says.
5. In the insurance arrangement, so nobody assumes the other side has covered the cargo.

These are five places one decision has to be reproduced without drifting, and drift is exactly what happens when the term lives in a template that has been copied for years. Keeping the trading terms in a maintained contract document rather than in a habit is the cheap fix; Ettex Docs holds the clause and its history, so a change agreed with a customer reaches the contract instead of only the shipping desk.

Choosing rather than inheriting

Most companies use the incoterm they have always used. The questions worth asking annually: can we actually clear export or import where the term requires it; are we insuring cargo whose risk has already passed to someone else; and is freight being priced into our margin under a C-term without anyone reviewing it. Each has a straightforward answer and a recurring cost when it goes unasked.