Incoterms commercial rules – what’s worth knowing about them?

Everyone associated with the transport industry and forwarding companies has certainly heard a phrase such as Incoterms at least once, but not everyone understands what it means. At the first glance, it may look complicated but knowing them is important for those who have something to do with import. Remembering the Incoterms rules, it is crucial to know the obligations of the buyer and the seller.

The definition of Incoterms

When using the freight transportation services, one should know that Incoterms are the International Trade Terms. The rules were developed by the International Chamber of Commerce in Paris to minimize misunderstandings between suppliers and recipients. Thanks to clear rules of cooperation, both the transport of goods and the scope of responsibility between the contractor and the client are more transparent. Incoterms are usually used for import and export, but can also be utilized for domestic deliveries.

Incoterms are designed to determine, at the beginning of cooperation, what will be the division of transport service costs and the division of responsibility for the transported goods (risk of damage or loss).

Incoterms are:

  • Optional,
  • recommended,
  • international,
  • concluded between the buyer and the seller.

The definition itself clearly states, that in case of Incoterms we are dealing primarly with the sales, therefore, these rules do not directly apply to the carrier and freight forwarder. On the other hand, the mentioned set of rules has a huge impact on how the transport is organized.

What aspects are regulated by Incoterms?

At the time when the contract content is agreed between the seller and the buyer, each party should share the costs of loading, customs, transport or insurance of the goods. There are no contradictions for the division to be made independently, but the top-down rules set by Incoterms allow you to sort it out. By choosing the right one, you can quickly determine which obligations are imposed on the buyer and the seller, which is very helpful. It is worth to at least briefly explain what the most important of them mean.

EXW rule

In this case, the seller is involved the least. Their obligation is to hand over the goods to the buyer at his workplace or warehouse for collection.

FCA rule

This is an extension of the previous EXW rule. The difference, however, is that the loading can not only take place at the seller’s place, but also at another, previously agreed place (in the seller’s country).

CPT rule

Here, there seller hires the carrier. Due to this, the seller must take into account the obligation to deliver the goods to the agreed place (in the buyer’s country).

CIP rule

This is an extension of the CPT rule with a provision on the obligation to insure goods. No other rule regulates the question of the necessity of insurance. In this case, the seller is obliged to pay the insurance from the place of loading of the goods to the place of unloading at the buyer’s.

DPU rule

This one is new when it comes to Incoterms 2020 and replaced the DAT rule. The new solution informs us that the delivery of goods does not have to take place only at the terminal, but it is also possible to choose another place.

DAP rule

This formula in fact duplicates all the obligations of the DPU rule, except for the unloading obligation. This, in turn, is the obligation of the buyer, not the seller.

DDP rule

The last rule assumes that full responsibility, as well as transport costs rest on the shoulders of the seller. Unloading is the only obligation that the buyer has to bear.