INCOTERMS, an abbreviation for International Commercial Terms, constitute a standardized set of international trade terminology employed within international contracts and commercial dealings. These terms were initially introduced by the International Chamber of Commerce (ICC) in 1936 and have subsequently undergone multiple revisions. The most recent version is INCOTERMS 2020.

They serve to establish a common language and universal framework for participants engaged in international trade, including both buyers and sellers. Moreover, outline the duties, risks, and expenses associated with the shipment and delivery of goods between parties. INCOTERMS function as a critical instrument in assuring that all parties involved have a clear understanding of their responsibilities throughout the shipping process.

The reasons why the ICC formulated these terms are as follows:

• Establishing universally accepted sales terms on an international scale.
• Removing obstacles within sales agreements.
• Creating a global terminology for pricing in international commerce.
• Mitigating risks linked to sales contracts.

In fact, there are four main categories of INCOTERMS based on the mode of transportation used in international trade and the point at which risk and responsibility for the goods transfer from the seller to the buyer:

• The ‘E’ terms – departure
• Ex works (EXW) – In this category, the seller’s responsibility is minimal. The seller delivers the goods to the factory outlet. The buyer arranges transportation and insurance till the final destination. The seller has to just ensure that the goods are ready for collection.
• The ‘F’ terms – main carriage unpaid

The F Group includes terms in which the seller’s duty is to transport the goods to a designated location, commonly a transport terminal or port while the buyer takes charge of arranging transportation and insurance from the moment the goods are loaded onto the vessel. Within these terms, the shift of risk and responsibility from the seller to the buyer occurs at the specified location which may vary depending on the particular Incoterm category within this group.

• Free Carrier (FCA) ­– The seller delivers the goods to a named point (e.g a warehouse). The risk and responsibility for the goods transfer from the seller to the buyer at the named place or when the goods are handed over to the carrier.
• Free Alongside Ship (FAS) – The seller delivers the goods on the quay or on lighters alongside the vessel. The risk and responsibility during transport as well as the transport costs transfer to the Buyer at the quay or on the lighters.
• Free on Board (FOB) – The seller is responsible for delivery of the goods on board the vessel at the named port of shipment. The risk and responsibility for the goods transfer from the seller to the buyer when the goods are loaded on the vessel.
• The ‘C’ terms – main carriage paid

This group includes terms where the seller is responsible for arranging and paying for transportation to a named destination, which may be a port or another location. Under these terms, the risk and responsibility typically transfer from the seller to the buyer at the named destination. In fact, the buyer is responsible for insurance and import duties.

• Cost and Freight (CFR) – Seller pays for transport to a named destination. The risk of loss or damage during transportation, as well as the transport and delivery costs, shifts to the buyer when the goods are loaded onto the vessel.
• Cost Insurance and Freight (CIF) – Seller pays for transport and insurance to a named destination. The risk of loss or damage during transportation, as well as the transport and delivery costs, shifts to the buyer when the goods are loaded onto the vessel.
• Carriage or Freight Paid to (CPT) – This term is used in multimodal transport. The seller pays for transport to a named destination. The risk of loss or damage during transportation, as well as the transport and delivery costs, shifts to the buyer when the goods are loaded on the first carrier; however, from the first carrier to the final destination, insurance for the transport is arranged and paid for by the Buyer.
• Carriage or Freight and Insurance Paid to (CIP) – This term is also used in multimodal transport. The seller pays for transport and insurance to a named destination. The risk of loss or damage during transportation, as well as the transport and delivery costs, shifts to the buyer when goods are loaded on the first carrier.
• The ‘D‘ terms – arrival

Under this category, the seller has the most significant responsibility and risk. In other words, he is responsible for all the costs, including transportation, insurance, import duties, and taxes. In these terms, the risk and responsibility transfer to the buyer upon delivery at the named destination.

• Delivered Ex Ship (DES) – Seller delivers goods to the Buyer at the named destination in the buyer’s country. The risk of loss or damage during transportation, as well as the transport and delivery costs, are upon the seller until the goods are discharged from the vessel.
• Delivered Ex Quay (DEQ) – Seller delivers the goods to the Buyer at the quay of the named destination. The risk of loss or damage during transportation, as well as the transport and delivery costs, are upon the seller until the goods are placed on the quay at the port specified by the Buyer (in the exporting country).
• Delivered at Frontier (DAF) – Seller delivers the goods to the Buyer at the The risk of loss or damage during transportation, as well as the transport and delivery costs, are upon the seller until the goods arrive at the frontier (in the importing country).
• Delivered Duty Unpaid (DDU)/ Delivered Duty Paid (DDP) – Seller delivers goods to the Buyer at the named destination in the buyer’s country. The risk of loss or damage during transportation, as well as the transport and delivery costs, are upon the seller until the goods arrive at the customs clearance port of the importing country. Under DDU terms customs duty is paid by the Buyer, while under DDP is paid by the Seller.

As a result, in the negotiation of a transaction between a buyer and a seller, several critical issues must be addressed before finalizing the contract. Particularly, when the item being sold is situated in one geographical location and needs to be transported to another, the matter of transportation costs becomes a critical consideration. This is precisely where INCOTERMS come into play and become essential in the negotiation process.

It is worth emphasizing that using the INCOTERMS is not compulsory at all. The parties involved in the negotiation will determine whether or not to incorporate INCOTERMS into their contract. Nevertheless, in situations where disputes and complications arise, employing INCOTERMS within the written contract simplifies the process of determining responsibility and resolving disputes.

Dott.ssa Niloofar Foroozanfar 

Avv. Lorenzo Macchi 

Niloofar Foroozanfar