Companies involved in international trade all rely on Incoterms to agree on the responsibilities of the seller and buyer in their commercial transactions. Although buyers and sellers are free to negotiate and set contractual terms, customs and understandings may differ from country to country. Incoterms help to avoid misunderstandings by defining a common, international set of commercial rules.
What are Incoterms?
Created in 1936 by the International Chamber of Commerce (ICC), Incoterms (International Commercial Terms) are a set of rules governing international commercial transactions, particularly the terms of delivery of goods. Their purpose is to determine how responsibilities are divided between the seller and the buyer with regard to transport, insurance, customs procedures, duties and taxes, and the transfer of risk.
These standardized commercial terms are a major asset for companies engaged in international trade. They provide a common, universal language for international trade, defining rules that are approved and recognized by all companies worldwide. It is important to note that Incoterms apply exclusively to tangible goods. Services and dematerialized products are excluded from their scope. In the event of a disagreement or dispute between the buyer and seller, these terms serve as a reference.
Incoterms provide clear answers to the following questions:
- Which party is responsible for the shipping costs?
- Which party takes out the insurance and bears its expenses?
- Which party is responsible for import-related costs?
- Which party must handle customs clearance formalities?
- What are the obligations of each party, and for which segment of the transport?
- Which party must obtain the supporting documents related to the goods?
- Which party communicates with the other, at what time, and by which means?
- Which party chooses the type of packaging?
- At what point does the transfer of risk occur?
Note: It is generally the seller who selects the applicable Incoterm and indicates it on the commercial invoice. It appears alongside the HS code (or SH in French), which is used by customs authorities to classify products and determine customs duties, among other things.
Why use Incoterms?
For companies, using Incoterms offers many advantages. It allows them to:
Clearly define responsibilities
By using Incoterms, sellers and buyers precisely establish each party’s responsibilities and obligations throughout the entire process of transferring goods, thereby reducing the likelihood of misunderstandings and disputes.
Reduce the risk of disputes
Using standardized terms that are internationally understood and accepted enables companies to prevent disputes that may arise from cultural or linguistic differences, thereby reducing the risk of conflicts that could lead to a loss of time and/or money.
Control costs
By determining which party is responsible for the cost associated with each stage of the logistics process, companies gain better control over their expenses and can optimize their budget more effectively.
Ensure regulatory compliance
Incoterms comply with international trade practices and are often required in international sales contracts, ensuring that operations adhere to the applicable legal requirements.
Simplify negotiations
By establishing a framework based on transparent and predefined principles, Incoterms facilitate commercial negotiations on the basis of standardized information that is easily understood by all parties.
The 11 Incoterms divided into two categories
There are 11 Incoterms, each identified by a three‑letter code and organized into two main categories depending on the mode of transport involved: those that apply to all modes of transport, and those restricted to maritime and inland waterway transport.
Incoterms applicable to all modes of transport
- EXW (Ex Works): the seller makes the goods available at their premises on a specified date. The entire process is the responsibility of the buyer, both in terms of costs and risk. The buyer must arrange and finance the transport, handle export and import formalities, and bear all related fees and taxes.
- FCA (Free Carrier ou « franco transporteur »): the seller delivers the goods to a carrier chosen by the buyer. Export procedures and costs are the responsibility of the seller, while the buyer assumes the costs and risks from the moment the goods are handed over to their designated carrier.
- CPT (Carriage Paid To): the seller pays for the transport up to a specified destination, but the risk transfers to the buyer as soon as the goods are handed over to the first carrier.
- CIP (Carriage and Insurance Paid To): this operates in the same way as CPT, except the seller is required to take out insurance covering the risks of loss or damage to the goods.
- DAP (Delivered At Place): the seller covers transportation costs and bears all risks until the agreed delivery point. However, the seller does not handle customs procedures.
- DPU (Delivered at Place Unloaded): the seller is responsible for transporting and unloading the goods at the agreed location. This is the only Incoterm that requires the seller to handle unloading. The seller also manages customs clearance at export. The buyer is responsible for import clearance and the associated costs.
- DDP (Delivered Duty Paid) : the seller assumes all costs and formalities up to final delivery, including customs clearance.
Incoterms reserved for maritime and inland waterway transport
- FAS (Free Alongside Ship): the seller covers transportation costs up to the loading port and handles export formalities. The buyer bears costs and risks once the goods are placed on the quay, awaiting loading.
- FOB (Free On Board): the seller manages the loading of the goods, after which costs and risks are transferred to the buyer.
- CFR (Cost and Freight): the seller pays transportation costs up to the destination port (excluding unloading) and must cover duties and taxes, but the risk transfers once the goods are on board the vessel.
- CIF (Cost, Insurance and Freight): same mechanism as CFR, but with insurance added at the seller’s expense, which must cover at least the value of the goods, plus a 10% surcharge.
EXW : the Incoterm most favorable to the seller!
If, in the context of an international commercial transaction, you are preparing to ship your goods abroad and the negotiations allow it, you should not hesitate to choose and indicate the EXW Incoterm on your commercial invoice. It minimizes your responsibilities and the charges you must bear, since all you need to do is prepare the goods at your premises.
Incoterms: continually evolving rules
Naturally, the rules governing international trade must adapt to a changing world. After the 2010 Incoterms, an updated version was introduced in 2020, which remains the reference standard today. It is still possible to apply the 2010 version, provided this is explicitly stated during negotiations to avoid any misunderstanding between the contracting parties.
Among the major changes introduced in 2020 is the adoption of the term DPU to replace the former DAT (Delivered at Terminal), reflecting the growing importance of deliveries made at locations other than terminals, such as warehouses or production sites. The FCA Incoterm was also amended to allow the use of an optional bill of lading with an onboard notation, facilitating operations for sellers.
More generally, the 2020 Incoterms place greater emphasis on the security of goods and on the adaptability of the terms to meet the diverse needs of companies, particularly regarding insurance and customs formalities.
The distinction between departure and arrival terms
Departure sales include eight Incoterms (during the main transport, the goods travel at the buyer’s risk):
- Multimodal Incoterms: EXW / FCA / CPT / CIP
- Maritime Incoterms: FAS / FOB / CFR / CIF
As for arrival sales, three Incoterms are involved (during the main transport, the goods travel at the seller’s risk): DAP / DPU / DDP.
To optimize logistics and prevent potential misunderstandings when transferring goods from one market to another, Incoterms have become indispensable—particularly given the scale and speed of today’s trade flows. They do more than simplify transactions: they help strengthen trust between trading partners, thereby fostering long‑term and mutually beneficial business relationships.
In addition to using Incoterms, and to protect your interests (including your margins), it is important to secure the payment of your invoices, as initiating legal action against a foreign company can prove complex and the chances of success often uncertain. To conduct business with greater peace of mind, you may consider taking out trade credit insurance and, in parallel, requesting an investigation into your counterparty’s financial soundness even before establishing a commercial partnership. Finally, remember that the Incoterm used must also appear in your general terms and conditions of sale.
