Incoterms Meaning: What the Rules Are and How They Work
Incoterms is a contraction of International Commercial Terms. They are a set of standard three letter rules published by the International Chamber of Commerce that define the responsibilities of a buyer and a seller in a trade transaction.
The short definition: an Incoterm tells you who arranges transport, who clears customs, who pays which cost, and at what precise moment risk passes from seller to buyer.
Why the rules exist
Before the ICC published the first edition in 1936, a phrase like free delivery meant different things in different countries. A dispute over who paid for unloading turned into a dispute over whose commercial custom applied. Incoterms replaced that with a common vocabulary. When a contract says FCA followed by a named place and the edition, both parties are pointing at the same published text, whatever their nationality or trade background.
The rules are updated roughly every ten years. The current edition is Incoterms 2020.
How an Incoterm is written
A complete Incoterm has three parts, and leaving one out is where problems start.
- The three letter code. For example CIP.
- The named place or port. As precisely as possible. A street address beats a city name, and a city name beats a country.
- The edition. For example Incoterms 2020.
So a properly written term reads: CIP, Jebel Ali Free Zone Warehouse 12, Dubai, Incoterms 2020. Writing simply CIP Dubai leaves both the exact delivery point and the applicable insurance level open to argument.
What the rules cover
Each of the eleven rules allocates the same set of obligations between the two parties:
- Arranging and paying for carriage on each leg of the journey
- Export clearance in the seller's country and import clearance in the buyer's
- Loading and unloading at each point
- Insurance, where the rule requires it
- The exact place where delivery occurs and risk passes
What the rules deliberately leave out
This is the half people miss, and it causes more trouble than any misunderstanding of the codes themselves. Incoterms say nothing about:
- Ownership. Title passes according to the sale contract and the governing law, not the Incoterm.
- Price and payment. When and how you get paid is a separate matter, usually handled by the payment terms or a letter of credit.
- Product quality or specification. An Incoterm is silent on whether the goods conform.
- What happens on breach. Remedies sit in the contract.
- Force majeure and sanctions. Also contractual.
An Incoterm is one clause in a sale contract. It is not the contract.
Cost and risk are two different questions
The most useful single idea in the whole system. Under several rules the seller pays to move goods that are already moving at the buyer's risk. CFR and CIF both work this way, and so do CPT and CIP. The seller books and pays for the main carriage, but if the cargo is damaged in transit, that is the buyer's loss to claim.
Buyers who assume that whoever pays the freight carries the risk are the ones who discover the gap at claim time. We look at where risk sits under each rule in the full Incoterms guide.
The eleven rules in brief
Seven work for any mode of transport: EXW, FCA, CPT, CIP, DAP, DPU and DDP. Four are for sea and inland waterway only: FAS, FOB, CFR and CIF.
They run in rough order of increasing seller obligation. EXW asks least of the seller, DDP asks most. Choosing well means matching that obligation to who is genuinely better placed to handle each step, which we work through in choosing the right Incoterm.
If your team handles shipping documents regularly, our Mastering Incoterms 2020 course covers all eleven rules in detail, and Freight Forwarding puts them in the wider context of moving cargo.
Frequently asked questions
What does Incoterms stand for?
International Commercial Terms. They are published by the International Chamber of Commerce and are updated roughly every ten years.
Are Incoterms a law?
No. They are standard rules that become binding only when a contract incorporates them. Once a contract names an Incoterm and its edition, the parties are bound by that published text.
How should an Incoterm be written in a contract?
Three parts: the three letter code, the named place as precisely as possible, and the edition. For example CIP, Jebel Ali Warehouse 12, Dubai, Incoterms 2020.
Do Incoterms decide who owns the goods?
No. Incoterms cover delivery, cost and risk only. Ownership is decided by the sale contract and the governing law.
Which edition should we use?
Incoterms 2020 for new contracts. Earlier editions remain valid if named, so the important thing is to state the edition explicitly.
