International Commercial Terms / INCOTERMS

INCOTERMS is a globally known and used collection of standards of the International Chamber of Commerce, whose clauses are the essential contractual terms of international sales transactions. They help to establish shipping incoterm.

In international trade, the exporter and the importer are often separated by a landmass, so the costs of transporting the goods that are the subject of their contract and the risks associated with transportation are significant. It is a question of bargaining and power relations, how these are shared between the parties. The agreement is recorded in the shipping incoterm condition of the contract.  

Shipping incoterm is the geographic point up to which costs and risks related to the delivery of a good are borne by the seller, and where these costs and risks are transferred to the buyer. Its definition is one of the most essential contractual conditions, both from the point of view of business calculation and the clear division of tasks.

Based on repeated business practices, already in the XIX. In the 19th century, three-letter abbreviations were created for each continent and country for the division of transport costs and transport risks. Businessmen thought they knew their content, so they considered it sufficient to use these abbreviations in their contracts. 

Filling the most common abbreviations with uniform content, the Paris International Chamber first published them in 1936 under the name INCOTERMS (International Commercial Terms). Its clauses ensured the prevention of disputes arising from different interpretations of individual abbreviations. The content of INCOTERMS has been modified several times by the International Chamber of Commerce (ICC), the clauses of INCOTERMS® 2010 have been replaced by INCOTERMS 2020® as of January 2020. 

INCOTERMS® is not a law, its application in the contract is not mandatory, it is a collection of common terms, a recommendation for businessmen around the world. The contracting parties are free to decide whether to submit their contract to INCOTERMS. The rights and obligations listed there bind the seller and the buyer only if they expressly refer to the INCOTERMS itself in their contract and to the year of their choice (for example, the FOB Hamburg INCOTERMS 2020 year).

The INCOTERMS® 2020 standard collection offers a choice between 11 clauses. Some of them can only be interpreted in the case of water (sea and river) goods transport: 

• FAS - Free Alongside Ship (placed next to the ship's side); 
• FOB - Free on Board (loaded on board); 
• CFR – Cost and Freight (cost and freight cost); 
• CIF – Cost Insurance and Freight (cost, insurance and freight). 

The other clauses are applicable to all modes of transport (including combined transport): 

• EXW – Ex Works (vendor site); 
• FCA - Free Carrier (saved and loaded into a vehicle); 
• CPT - Carriage Paid To (carriage paid to ...); 
• CIP - Carriage and Insurance Paid To (carriage and insurance paid until ...); 
• DAP - Delivered at Place (delivered to a specified location); 
• DPU - Delivered at Place Unloaded (delivered to a specified place without unloading); 
• DDP - Delivered Duty Paid (delivered, customs paid). 

All clauses detail the obligations of both the seller and the buyer with regard to certain issues of the carriage of goods. Thinking here, for example, about the means of transport, ordering the space, loading, unloading, and their costs, the documents to be submitted by the seller, certifying the performance (e.g. Bill of Lading for a letter of credit), the risk bearing, and the conclusion of the freight insurance contract.